UPDATE 1-New Zealand economy in deepest recession as Q2 GDP shrinks

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By Praveen Menon

WELLINGTON, Sept 17 (Reuters) - New Zealand fell into its deepest economic slump on record in the second quarter as its battle against the coronavirus pandemic paralysed business activity, official data showed on Thursday.

Gross domestic product contracted a seasonally adjusted 12.2% quarter-on-quarter, its sharpest quarterly contraction on record and largely in line with forecasts of a 12.8% decline from economists polled by Reuters. GDP fell 12.4% year-on-year.

The Reserve Bank of New Zealand had forecast a quarterly and annual GDP decline of 14% in its August statement.

Growth has been hit by a standstill in economic activity as a strict nationwide coronavirus lockdown in April and parts of May forced almost everyone to stay at home and businesses to shut.

The GDP data confirms New Zealand's worst recession, defined as two straight quarters of contraction, since 2010, with GDP in the March quarter falling 1.6%.

In comparison, second quarter economic growth in neighbouring Australia which enforced a less stringent COVID-19 lockdown fell 7.0%, while the United States recorded a 9.1% drop.

But economists say New Zealand will bounce back faster, while other nations are still struggling to contain the coronavirus.

"We expect the June quarter's record-breaking GDP decline to be followed by a record-breaking rise in the September quarter," said Westpac Senior Economist Michael Gordon.

Prime Minister Jacinda Ardern's government, which faces an election on Oct. 17, has said success in suppressing the virus locally is likely to help recovery prospects.

Treasury forecasts released on Wednesday showed that while New Zealand's response to COVID-19 helped lessen the short-term economic shock, massive debt and continuing disruptions will delay a full recovery.

Economists say the GDP data will have little impact on the central bank's policy, which is expected to hold interest rates at a record low of 0.25% at its meeting on Sept. 23. (Reporting by Praveen Menon; Editing by Sam Holmes and Muralikumar Anantharaman)