New Zealand economy contracts sharply, fuelling bets of steeper rate cuts

Economic Performance - New Zealand's economy contracted by 0.9% in Q2, worse than the expected 0.3% decline, marking a contraction in three of the last five quarters [1][2] - Annual GDP decreased by 0.6%, contrary to market expectations of no change [2] Market Reactions - Following the GDP data, two-year swap rates fell by 10 basis points to 2.7290%, the lowest since early 2022, and the kiwi dollar dropped by 0.5% to $0.5932 [2] - The market is now anticipating a total of 58 basis points in cuts to the official cash rate (OCR), up from 48 basis points prior to the GDP release [3] Central Bank Outlook - The Reserve Bank of New Zealand (RBNZ) is expected to cut the OCR by 50 basis points in October and an additional 25 basis points in November, as indicated by Westpac [4] - The RBNZ has noted that household and business spending is constrained by uncertainty, falling employment, and rising prices for essentials [3][4] Sector Performance - The construction sector continues to decline, manufacturing is affected by slowing goods exports, and the service sector remains weak due to stagnant tourism [4] - The economy has also been impacted by U.S. import tariffs set at 15% on various products, including those from New Zealand [5] Future Expectations - There are signs of improvement in the third quarter, with slight increases in manufacturing and services indexes, as well as monthly employment and card spending data [6] - ANZ Senior Economist suggests that growth has returned in a muted manner, indicating the country may avoid another technical recession [7]