GDP shrinks far more than expected in Q2

GDP reading: The economy shrank by 0.9% in the second quarter in sequential terms, a much weaker result than markets were expecting. Activity remains sluggish despite aggressive rate cuts over the last year, leaving the economy smaller than it was at the start of 2024. Part of the reason for the lack of a boost from monetary easing is because many households on fixed-term home loans haven’t received the benefit of falling interest rates.

Broad-based decline: Goods-producing industries shrank 2.3% quarter on quarter in Q2. Manufacturing slumped 3.5%, as both food and non-food categories posted broad-based weakness. Some of this reflects quarterly volatility linked to the timing of livestock processing, though underlying softness was also evident. Construction activity slipped 1.8%. Primary industries contracted 0.7% due to declines in mining, fishing and forestry, while services activity was flat in Q2 vs Q1.

Second half should be better: Our Consensus is currently for the economy to return to growth in the second half of the year, though to still end 2025 smaller than at the start of last year.

Panelist insight: On the data and outlook, ANZ’s Matthew Galt said: “[The] data certainly presents an economy struggling for growth when it has considerable spare capacity. Global uncertainty and market volatility has likely played a role in the slowdown by prompting firms to defer their investment and employment decisions. High food and energy costs have also weighed on households through the quarter. […] Signs that growth has returned in Q3, albeit in a muted manner, suggest that we will avoid another technical recession of two consecutive quarters of falling GDP.”

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