The economy shrank by 0.9% – much more than the 0.4% contraction economists had been forecasting.
Virtually every industry felt the pain with falls in 10 out of 16 industries monitored by Stats NZ.
Manufacturing in particular was hit hard – down 3.5% while construction was down 1.8%.
On a per capita basis it was even worse, with GDP falling 1.1% in the quarter.
For the June year, GDP fell by 1.1%.
New Zealand was on a roll over the summer months.
The first quarter of this year saw a rise of 1.2% in GDP.
But the US tariff announcements really turned the tap off.
Consumer confidence and spending have remained weak, and retailers are still under pressure.
Bank economists are now calling for the Reserve Bank to deliver an oversized cut of 50 basis points to the Official Cash Rate (OCR) on October 8.
Before the GDP figures came out, most were expecting the RBNZ to deliver a 25-basis-point cut in October, with another cut due before February next year.
Now, some believe a bigger cut is needed sooner.
Kiwibank said the economy’s contraction showed the Reserve Bank was “behind the eight ball”.
The bank’s chief economist, Jarrod Kerr, called for a half-point cut at the central bank’s next meeting.
“We were just climbing out of last year’s recession, but here we are moving backwards, once again,” Kerr said.
While ASB economists said that, with New Zealand lacking economic tailwinds, “the onus falls on the OCR to support the economy”.
The challenge is keeping inflation under control.
Data out this week also showed food prices are still on the rise.
Food prices rose 5% in the year to August, with milk, cheese and butter all strongly contributing.
The average price for two litres of milk is up 16.3% annually ($4.72), a 1kg block of cheese is up 26.2% annually ($12.89), and a 500g block of butter is up 31.8% annually ($8.58).
The Reserve Bank’s key mandate is to keep inflation between 1% and 3%.
Inflation was at 2.7% in July.
Economists expect rising food prices will see the Consumers Price Index – our key measure of inflation – rise to 3%, the upper limit of the Reserve Bank’s band.
We won’t know where inflation lands officially until October 20 – after the next OCR announcement.
Rising inflation and low growth are a difficult combination for a central bank to deal with.
But at the last Monetary Policy Committee meeting, there were already some in the committee who favoured a deeper cut.
Four members wanted a 25-basis-point cut, but two voted for a 50-point cut.
The Reserve Bank is forecasting inflation to hit 3% in the September quarter before falling to 2% by mid-2026.
Committee members were already worried about growth at the August meeting.
“Spending by households and businesses has been constrained by global economic policy uncertainty, falling employment, higher prices for some essentials, and declining house prices,” they said at the time.
The central bank expects growth to resume in the September quarter.
But it’s hard to know where that growth will come from.
The services sector continued to shrink last month, according to data released on Monday.
The BNZ/BusinessNZ Performance of Services Index (PSI) fell 1.4 points to 47.5 in August, marking 18 consecutive months of contraction.
Manufacturing also slumped in August, erasing its bump in July.
The housing market remains largely flat. And jobs are still being cut.
Carter Holt Harvey told staff this week it is looking at closing its plywood factory in Tokoroa, with a potential loss of 100 jobs.
It’s another major blow for the town, which lost 130 jobs in July after the paper mill was closed.
The Government can’t afford to borrow more to provide economic stimulus, so the onus is on the Reserve Bank to cut deep and give New Zealand a jolt start.
