The figures painted a gloomier picture than most were predicting
New Zealand's economy delivered a reality check this week, with the June quarter GDP figures showing a deeper contraction than anyone expected.
New Zealand's June quarter GDP declined by 0.9%, significantly exceeding the 0.3 -0.4% decline forecast by most economists and the Reserve Bank. The result has prompted major banks to revise their Official Cash Rate (OCR) forecasts, with several now expecting a 50 basis point cut at the October meeting rather than the previously anticipated 25 basis points.
Kelly Eckhold, Westpac chief economist, told NZ Adviser that it was a “significantly weaker outcome than expected.” Westpac had been forecasting a 0.4% decline.
“It’s left us concluding that the Reserve Bank will think there is quite a bit of excess capacity sitting in the economy as of Q2 than they thought previously,” Eckhold said.
Revised rate forecasts
ASB now expects the RBNZ to cut the OCR by 50 basis points in October and 25 basis points in November, bringing the year-end rate to 2.25%. It notes that production GDP is now 0.6% lower than the RBNZ's August estimate, suggesting greater economic slack than previously anticipated.
Westpac has similarly revised its forecast to expect a 50 basis point cut in October. Eckhold says that while the August meeting held off on a larger cut, the picture will likely be quite different in response to these latest figures.
“The Monetary Policy Committee (MPC) seems to be of a mind to put some guardrails against the possibility that growth remains pressed for a long period,” Eckhold said.
“That’s why they did the 25 basis point cut and signalled two more, and we had a couple of MPC members even speculating about the need for a 50 basis point cut in August.”
“Based off this data, you’d argue that if they were to meet today, those arguing for the 50 basis point cut would be more emboldened,” he said. “The case for getting to at least 2.5% more quickly will be significantly bolstered. That’s why we’ve moved to expecting a 50 basis point cut in the October OCR review.”
Kiwibank is also advocating for a 50bp move in October, and has been strongly in favour of quicker rate cuts throughout the year. “Get it done,” Kiwibank said in its latest note. “Get to 2.5% asap.”
Context, housing and future outlook
The June quarter result follows upward revisions to the March quarter, which was revised from 0.8% to 0.9% growth. But despite the quarterly volatility, Eckhold noted the economy had recorded "two decent quarters of growth in the fourth quarter of last year and the first quarter of this year.”
He said this isn’t a reason to be projecting doom and gloom just yet.
“What we’ve got in the second quarter is a temporary setback, because this -0.9% to some extent reflects the growth that was measured in Q1, and it’s just being smoothed out,” he said.
“We do expect a 0.6% increase in the third quarter. So it’s more of a bumpy profile as opposed to something necessarily negative.”
On the housing market, Eckhold noted that the data has actually been slightly better than expected. Westpac had pencilled in a small drop in prices for the month of August, but prices actually remained flat.
“We had a forecast of 0.6% growth in 2025, and now it might be a little stronger,” he said. “I think the outlook for 2026 is quite different because these markedly lower interest rates will have implications for the economy next year.
“We are well into the stage now where these lower interest rates should be supporting the extra sensitive parts of the economy - private consumption, residential investment and business investment,” Eckhold said. “We should start to show more consistent growth once we get to the latter part of this year and through to next year.”
