By Wayne Cole

SYDNEY (Reuters) – New Zealand’s economy sank into recession in the third quarter as activity dived far more sharply than expected, while the prior quarter was also revised sharply downward, a dire result that cements the case for more aggressive rate cuts.

The local dollar extended an overnight rout to hit a fresh two-year low of $0.5620, having already shed 2.2% in the wake of a hawkish easing from the U.S. Federal Reserve.

Markets also added to wagers the Reserve Bank of New Zealand would slash rates further, having already cut by 125 basis points to 4.25%. Swaps now implied a 91% probability of a 50-basis-point cut in February, and rates were seen declining to 3.0% by the end of 2025.

Thursday’s data showed gross domestic product dived 1.0% in the September quarter from the prior quarter, dwarfing market forecasts of a 0.2% contraction.

The June quarter was revised to show a fall of 1.1%, and two straight quarters of decline is the technical definition of recession.

The outcome was far worse than the 0.2% drop forecast by the RBNZ, and came just two days after New Zealand’s Treasury had predicted a fall of only 0.1%.

The weakness was spread across industries and particularly sizeable in manufacturing, utilities and construction. Household and government spending dropped in the quarter, while investment and exports also dragged.

For the year to September, output was down a steep 1.5%, the sharpest fall since the pandemic and well outside forecasts of a 0.4% dip.

Setting aside the pandemic, this was the largest two-quarter decline since the painfully deep 1991 recession.

The picture was complicated by substantial revisions from the statistics bureau, which revised up GDP growth over the two fiscal years to March 2024 by almost 2 percentage points.

That made the starting point for this year stronger than first thought. It also erased a recession and a long period of stagnant growth that had contributed to the fall of the former Labour government.