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Finance Minister Michael Cullen has warned a recession cannot be ruled out as the economy struggles against a weak housing market, drought and the international credit crunch.
The Bank of New Zealand warned at the weekend that the economy was being hit by a "perfect storm" that would probably blow it into recession.
Dr Cullen today acknowledged it faced some stiff short-term challenges and a technical recession - negative growth for two quarters - could not be ruled out.
"Given drought, given the international financial turmoil, given the credit squeeze, given the housing market coming off, it would be foolish to rule out the possibility that there could be two successive quarters of very small negative growth at some point in the next year or so.
"But we are not expecting to see the economy going through the floor," he told reporters.
"I think people when they hear the word think of depression and something long, sustained and with large increases in unemployment.
"I don't see the prospect of that."
Asked if the Reserve Bank should be cutting the Official Cash Rate to cushion any blows, Dr Cullen said that was a matter for the bank's governor.
But he said business tax cuts, which come into force next month, would have a limited cushioning effect and monetary policy was still the best tool in that regard.
Prime Minister Helen Clark said there had been no advice from Treasury that the country was heading into recession, but there was likely to be some "rub off" from the weak United States economy.
However that was counterbalanced by rapid growth in the developing economies of Asia, such as China and India, she said.
"The advice I've seen is that New Zealand has a wide basket of markets that it trades into, in fact China on its own could substantially hold up commodity prices, so we are as well positioned as any country to deal with the volatility."
- NZPA
