Stronger-than-expected GDP growth raises risk Reserve Bank will pause cash rate cuts

GDP data due later today is expected to show that economic recovery rolled on with more strength than expected in the first quarter of the year.

In May, the Reserve Bank forecast growth of just 0.4% for the three months to the end of March.

However, most economists are now picking it will land at 0.7% when the GDP data is released by Stats NZ at 10.45am.

“Growth is mostly accounted for by strong primary and manufacturing activity, reflecting a robust start to the year for dairy, meat and fruit exports,” ASB economist Wesley Tanuvasa said.

Last week, a Government report forecast export earnings would hit $59.9 billion in the June 2025 year – $3b higher than projected in December.

“We think the bleeding finally stopped for construction, further supporting goods production,” Tanuvasa said.

But the services sector was likely to be mixed, he said.

Resilient tourism would support strength in wholesale and discretionary services, while pockets of weakness in public services remained.

The first-quarter release “would predate more material Trump-related ructions”, he said.

So an uncertainty hit wasn’t likely, leaving investment activity broadly unharmed for now.

But confusing the story, consumer spending still looked cautious to start 2025, Tanuvasa said.

Releases in the past week have also indicated that both the manufacturing and the service sectors slipped back into contraction in May.

The RBNZ made it clear a 25bp cut at its July meeting was not a done deal and decisions would be data-dependent, ANZ economist Matt Galt said.

“A reading above 0.4%, as we expect, would increase the risk of a pause in the easing cycle at the July meeting, as it could signal stronger underlying economic momentum,” he said.

“However, the details will matter. And in the bigger picture, the economy is still estimated to be operating with considerable spare capacity after a deep slide over the last few years”.

That meant it would take a period of elevated growth to bring about renewed upward pressure on core inflation, he said.

Westpac senior economist Michael Gordon said a 0.7% quarterly increase would likely present the RBNZ with a strong case for leaving the OCR unchanged at its next call on July 9.

There seemed to be a two-speed economy at play, Tanuvasa said.

Strong export earnings were bolstering the primary sector.

But there was a risk those strong prices would not last.

“We think downside growth risks still have credence because what’s driving growth is vulnerable to a tariff hit,” he said.

“Around 37% of total exports [goods and services] are to the US and China. The New Zealand economic outlook is dependent on whether exporters can diversify the concentration of demand over 2025.”

“We are less convinced the external sector can maintain such momentum in a trade war. However, a higher starting point for GDP and the modest repair of interest-rate sensitive sectors like construction, suggest a turning point.”

BNZ economist Doug Steel is also picking 0.7% growth for the quarter.

“We expect next Thursday’s data to confirm further economic recovery,” he said.

“The output gap still appears wide, and there is much uncertainty around the path ahead, but recovery looks as though it continued in the first quarter of the year.”

BNZ economists continue to pick two further cuts to the OCR, in July and August, to a low of 2.75%.

“But the risks of a July pause are certainly increasing,” he said.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.