New Zealand’s economy experienced a more severe contraction than anticipated in the second quarter of 2023, driven by declining construction activity and global economic uncertainties. Official data released on Thursday revealed a 0.9% quarterly drop in gross domestic product (GDP), significantly worse than the 0.3% decline forecasted by analysts and the Reserve Bank of New Zealand (RBNZ). This marks the third contraction in the past five quarters, with annual GDP falling by 0.6%, contrary to market expectations of stability. Following the disappointing data, the New Zealand dollar fell 0.5% to $0.5932, while two-year swap rates hit their lowest level since early 2022, sliding to 2.7290%. The market now anticipates a 58 basis point reduction in the official cash rate (OCR), with a 20% probability of a 50 basis point cut in October. The RBNZ had previously signaled two additional rate cuts this year, citing constrained household and business spending due to economic uncertainty, declining employment, rising essential prices, and falling house prices. Westpac senior economist Michael Gordon noted that the weaker-than-expected GDP outcome reinforces the RBNZ’s inclination to lower rates further. The economic downturn was widespread, with construction, manufacturing, and services sectors all underperforming. The situation was exacerbated by U.S. import tariffs imposed in April, set at 15% for New Zealand products, higher than the 10% rate for Australian goods. Despite the challenges, there are signs of a modest recovery in the third quarter, with improvements in manufacturing, services, employment, and consumer spending. ANZ Senior Economist Matthew Galt suggested that while the economy may avoid another technical recession, a 50 basis point rate cut remains a possibility if data continues to underwhelm.