New Zealand’s GDP grew by 0.8% in the first quarter compared to the previous quarter. This growth is slightly better than the 0.7% forecast and the Reserve Bank of New Zealand’s 0.4% estimate. The rise comes mainly from the services and manufacturing sectors, while construction has stabilized after prior declines. This marks the second straight quarter of economic growth. However, despite the positive news, the economy faces challenges. Annual per capita GDP continues to decline. Factors such as tariffs, a slowdown in consumer spending, and global volatility are making the outlook tough.

Detailed GDP Growth

Looking closely at GDP growth, we see business services gaining strength and a stable performance in manufacturing and construction. That said, new indicators suggest that economic activity may have reached its peak, raising concerns about potential stagflation. The Reserve Bank of New Zealand is expected to keep interest rates steady in July, with a possible cut in August that would lower the Official Cash Rate to 3%. Although the GDP growth offers some relief, rising oil prices from geopolitical issues may lead to higher inflation, which would complicate future monetary policy. Current data presents a mixed economic picture. The quarterly GDP increase of 0.8% surpasses both market predictions and the central bank’s earlier estimates, which is significant. The services and manufacturing sectors have primarily driven this growth, coupled with recovery in construction. It’s the second quarter of growth, which could look promising on its own. However, when we consider population growth, the situation becomes less bright. Per capita GDP still shows a declining trend, indicating that while the economy may be growing, the average individual or business isn’t seeing that same improvement. This is crucial to monitor since it explains why overall demand might still be weak, despite the headline growth. Global risks remain a concern. Tariffs abroad and slowing domestic consumer activity are continuing challenges. These are not just temporary issues; they signal that demand might not support significant growth. It’s less about past performance and more about sustaining momentum going forward. Caution is likely to prevail in the coming days.

Monetary Policy Considerations

The recent improvement is mainly due to growth in business services, which reflects future business confidence and corporate investment. If this trend continues, it may provide a stable base for economic activity in the near term. However, manufacturing and construction are steady but not accelerating. Worries arise from signs that activity may have peaked. Recent consumption indicators, activity surveys, and retail data show a cooling trend. This pattern raises concerns about policy lag and the possibility of prolonged stagnation, driven by rising import costs rather than domestic demand. Oil markets are also fluctuating again. Geopolitical tensions are driving prices higher, resulting in increased costs for businesses. This indirectly influences inflation expectations, which the central bank must address carefully. Their target band offers little leeway to ignore the secondary effects of rising energy prices. Right now, monetary policy decisions are expected to hold steady in July. Many predict a possible rate cut in August, reducing the cash rate to 3%, which would help ease pressure on sensitive sectors. However, this expected trend is not guaranteed. Rising energy prices or unexpected wage changes could disrupt this plan. From a trading perspective, the time for focusing on terminal rates has shifted. The emphasis should now be on the trajectory rather than the peak—specifically, how quickly expectations for easing change in response to future inflation signals. The next Consumer Price Index (CPI) and labor market data will likely influence yields and increase volatility in rate-linked structures—this is where opportunity and risk may arise. While growth isn’t declining, it isn’t fast either. Think of it as a steady pace—functional but vulnerable to setbacks. In this context, long gamma positioning is more sensible than making firm directional bets. Market participants should focus on how forward curves are valued over the next 3–6 months, rather than just on immediate meetings, as the narrative can shift without clear warning. Having options that don’t rely too heavily on a single economic perspective will be beneficial. Create your live VT Markets account and start trading now.

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