New Zealand's economy shrank in the second quarter, with declines in several major industries, which suggests the central bank may proceed with further rate cuts this year.

Official data released on Thursday revealed that GDP fell by 0.2% between April and June compared to the previous quarter, a smaller decline than the 0.4% contraction analysts had forecast.

This drop follows a 0.1% rise in the first quarter, which was revised down from an earlier estimate of 0.2% growth, Reuters reports.

Furthermore, annual GDP decreased by 0.5%, according to Statistics New Zealand, matching market expectations. 

The New Zealand Dollar remained nearly unchanged at $0.6213 after the data release, as the figures were considered too outdated to influence the rate outlook.

Markets are fully expecting a quarter-point rate cut in October, with a 28% chance of a 50-basis point reduction. Swaps currently price in 84 basis points of easing by the end of the year.

“The data today highlight that the economy was indeed in a weak patch in the second quarter, with widespread evidence that private demand is soft and that this is flowing through to multiple sectors of the economy,” said ASB Bank senior economist Kim Mundy.

Moreover, the data indicated declines in nine out of 16 industries, with notable weaknesses in retail trade, accommodation, agriculture, forestry, fishing, and wholesale trade. 

Conversely, the manufacturing sector saw the largest improvement.

Mundy added that the data did not significantly change the outlook for the Reserve Bank of New Zealand, and ASB Bank still anticipates the central bank will implement an additional 50-basis point cut by the end of the year.

At its last meeting in August, the central bank reduced the official cash rate for the first time in over four years, and RBNZ governor Adrian Orr said he would like to implement two additional cuts before Christmas. 

This move aligns with actions taken by other major central banks, such as the US Federal Reserve, which began a series of anticipated rate cuts with a larger-than-usual half-percentage-point reduction on Wednesday.

The European Central Bank and the Bank of Canada have also recently lowered their rates.

Westpac senior economist Michael Gordon noted that financial markets will likely focus on the possibility that the Federal Reserve's decision could pave the way for 50-basis point rate cuts in other regions, including New Zealand.

Yet “there isn't much in the local data that argues for the RBNZ to step up the pace of easing beyond what it had already signalled in its August policy statement,” he said.