The New Zealand dollar fell as low as 78.38 US cents from 78.90 cents immediately before the figures were released.
New Zealand's primary sector grew 6.5 per cent on an annual basis with favourable growing conditions through 2012 before the drought, which stoked dairy production.
Manufacturing grew 0.2 per cent in the March quarter, fuelled by a 3 per cent gain in food, beverage and tobacco manufacturing due to rising slaughter numbers fuelling meat manufacturing.
Westpac Bank economists Dominick Stephens and Michael Gordon reacted to the GDP news saying that the "weakness in the March quarter was payback from outsized growth in the December quarter, and was apparent across a range of sectors."
"This was a genuine downside surprise relative to expectations, and therefore leans in the direction of later/fewer interest rate hikes and a lower NZD. However, the surprise was relatively small and does not alter the fundamental characteristics of the economy," they said.
"We would still describe the NZ economy as being on a broadly accelerating trajectory, stimulated by the post-earthquake rebuild in Canterbury and rising house prices. However, this acceleration has been uneven across regions, and has been interrupted by the summer drought."
The bank's economists now anticipate another quarter of 0.3 per cent GDP growth in Q2, due to ongoing drought effects.
ANZ economist Mark Smith said this morning's GDP details highlighted an uneven expansion, driven by lifting construction sector activity and a Census boost.
"While a drought impact was evident, drought also looks set to weigh on activity over the middle of 2013 and we continue to pencil in a softish Q2 GDP figure," he said in a statement.
"The current lack of pricing pressure suggests no immediate need for the RBNZ to raise the OCR: that remains a story for somewhat down the track," said Smith. "We continue to expect a March 2014 start to the tightening cycle, with a gradual pace of policy tightening and a low OCR endpoint this cycle."
"Today's data confirmed the economy started 2013 on a mixed note, with recent quarterly volatility a reminder that the economy is navigating its way through various shocks. This volatility looks set to continue given the pending drought hit, with the required shift in resources to facilitate rising construction sector activity likely to create tensions," said Smith.
"Moreover, the housing-induced uplift still looks difficult to sustain without a pronounced improvement in the labour market backdrop, and with pending fiscal tightening and a RBNZ prudential policy response."
Earlier this month, the BNZ-BusinessNZ performance of manufacturing index showed New Zealand manufacturing activity rose in May to the highest level since June 2004, led by improved growth in production, new orders and employment.
Construction helped drive growth in the period, rising 5.5 per cent, on the back of residential building and the Canterbury rebuild effort. Investment in residential building climbed 9.6 per cent in its seventh quarterly gain and the biggest increase since September 2002.
Information media and telecommunications shrank 3.1 per cent in the quarter due to falling call minutes, and are down 1.1 per cent annually. Electricity, gas, water and waste services shrank 4.4 per cent as declining metal production manufacturing sapped electricity generation.
Service industries grew 0.5 per cent in the quarter with strong gains in professional, scientific, technical, administrative and support services, for an annual gain of 17 per cent. The BNZ-BusinessNZ performance of services index showed the sector grew at its fastest pace for a May month since 2007.
The expenditure measure of GDP, which measures the final purchases of locally produced goods and services, grew 0.3 per cent in the quarter, and was up 3.1 per cent annually.
Household consumption rose 0.4 per cent with increased spending on non-durable goods, such as food and non-alcoholic beverages. Spending was up 2.2 per cent in the year.
Gross fixed capital formation, which is made up of business investment and residential building investment, rose 0.4 per cent in the quarter, bolstered by residential investment activity. Investment in plant, machinery and equipment shrank 6.2 per cent. GFCF grew 6.7 per cent annually.
Inventories were built up by $340 million in the quarter, having been run down by $78 million in the December period, driven by manufacturing, forestry and logging.