WELLINGTON, Sept 19 (Askume) – New Zealand’s economy shrank in the second quarter as activity fell in some key sectors, putting the central bank on track to cut interest rates further this year.
Official data released on Thursday showed gross domestic output fell 0.2% in the June quarter from the previous quarter, wider than analysts’ forecast of a 0.4% contraction.
The previous first quarter growth was 0.1%, lower than the previous forecast of 0.2% growth.
Statistics New Zealand data showed full-year GDP fell by 0.5%, in line with market expectations.
The New Zealand dollar was nearly unchanged at $0.6213 after the data was released, with the data considered too old to impact the interest rate outlook.
The market has fully factored in a further 25 basis point rate cut in October and the probability of a 50 basis point rate cut is 28%. Swap rates will be reduced by 84 basis points by the end of this year.
Kim Mundy, senior economist at ASB Bank, said: “Today’s data highlights that the economy did indeed soften in the second quarter, with widespread evidence of soft private demand and this demand flowing across many sectors of the economy.”
The data showed activity fell in nine of 16 industries, with retail trade and housing, agriculture, forestry, fishing and wholesale trade all showing weakness. Manufacturing made the most progress.
Mundy said the data had not significantly changed the RBNZ’s case and ASB Bank expects the central bank to cut interest rates by another 50 basis points before the end of the year.
New Zealand Reserve Bank Governor Adrian Orr said the central bank cut its official cash rate for the first time in more than four years at its last meeting in August .He expects to cut interest rates two more times before Christmas.
This is in line with other major central banks having already begun cutting the cash rate. The Federal Reserve on Wednesday began an expected series of rate cuts , which were deeper than usual. The European Central Bank and the Bank of Canada also lowered interest rates.
Westpac senior economist Michael Gordon said financial markets would undoubtedly be closely watching the Fed’s decision, which could open the way for a 50 basis point interest rate cut elsewhere, including New Zealand.
But he added that “there is not much evidence from the local data that the Reserve Bank of New Zealand should increase the pace of easing more than it has already signalled in its August policy statement.”
