KEY POINTS:
As the global credit crunch worsens and rain refuses to fall on much of the country, economists have been cutting their forecasts for economic growth - some to the point of predicting a recession this year.
Even Finance Minister Michael Cullen says a recession cannot be ruled out, though he does not think it is probable.
The last recession was 10 years ago and the three main factors then have all come around again.
Interest rates and the dollar were high as the Reserve Bank governor stood on the brakes to bring inflation under control.
Then came two shocks: an international financial crisis (out of Asia) and a drought. The upshot was three consecutive quarters when the economy contracted.
But for all the sense of deja vu, the economy is not in free-fall. There is a bungy cord around its ankles.
One of its strands is the strength of the labour market.
The unemployment rate is 3.4 per cent, the lowest it has been for 22 years, and wages are growing at the fastest pace since 1992.
It is hard to get a serious recession going if people are not afraid of losing their jobs.
Since the 1998 recession there have been 10 years of Government surpluses. So incomes will get a further boost from tax cuts. The only questions are how much and when.
And over the past 10 years the relative value of the kinds of things we export, compared with the kind of things we import, has improved.
Even with sky-high oil prices the terms of trade are the most favourable since 1974. Terms of trade reflect what imports we can fund by a standard basket of exports - how many plasma TVs for a container-load of milk powder, you might say.
So even though the Ministry of Agriculture estimates the drought will cost farmers $1.2 billion this financial year, and though world dairy prices have come off their peaks, Deutsche Bank chief economist Darren Gibbs estimates dairy sector incomes will still be at least $2.5 billion higher than last season.
But these supportive factors won't be enough to avert a recession, only to keep it relatively shallow, says Bank of New Zealand economist Stephen Toplis.
"We have become victims of an almost perfect storm which has seen the economy afflicted by a combination of a global credit crisis, rising commodity prices eroding disposable incomes, a weakening international economic outlook, a housing market slump, very tight monetary conditions and a drought."
ANZ National Bank's chief economist Cameron Bagrie is reticent about using the "R" word, lest such talk becomes self-fulfilling.
Tongue in cheek, he prefers to say the economy is embarking on a period of "deferred achievement", just as in these politically correct times high school students never fail.
Less important than whether the economy strays over the line into technical recession - usually defined as two consecutive quarters of contraction - is that the slowdown is likely to be protracted, Bagrie says.
He is forecasting growth of just 1 per cent over 2008 and not much better in 2009. That compares with an average growth rate of 3.6 per cent between 2000 and 2007.
"It's not going to be a disaster but it's going to be very soft," Bagrie says.
The 1997/98 recession was relatively short and sharp because it mainly affected the business sector rather than households.
"Businesses cut investment, inventories, employment and costs to improve cashflows and restore balance sheets," Bagrie says. Consumer spending growth slowed but only to 2 per cent.
This time it is the household sector that needs to rein in spending and pay down debt, and that tends to be a drawn-out affair.
Household debt levels have increased by 75 per cent over the past five years, reflecting even stronger growth in house prices.
But the incomes out of which interest bills have to be paid have grown much more slowly.
And mortgage rates continue to rise. It is eight months since Reserve Bank governor Alan Bollard last raised his official interest rate but mortgage rates have risen by up to half a percentage point since then.
Because New Zealanders want to borrow a lot more than other New Zealanders are willing to save, the banks have to tap offshore capital markets to fund the difference.
In the wake of the US sub-prime mortgage debacle, nearly US$200 billion ($252 billion) has been written off the big global banks' balance sheets.
Wary that there may be more chickens to come home to roost, but uncertain about where, they have become increasingly reluctant to lend and demand higher interest rates when they do.
This is a problem for New Zealand because we are up to our national nostrils in debt to the rest of the world. At the end of September last year (the most recent official figures available) New Zealand's international liabilities were $280 billion, of which $207 billion was debt.
Even when offset by the income from New Zealand investment offshore, the cost of servicing those obligations was $12.3 billion for the year ended September 2007.
Basically that means that 26 days' worth of output from the economy that year did not belong to us but to the foreign suppliers of capital and credit upon whom we depend.
And it means that the country is very exposed to a global credit crunch pushing up the cost of credit - just as it benefited when the world was awash with cheap money, from which the banks could fund fixed-rate mortgages at rates a lot lower than now.
Westpac's chief economist Brendan O'Donovan sees the outlook as a battle royal between powerful opposing forces.
On one side is the boost to incomes from a strong labour market, tax cuts (starting, he believes, in October) and the dairy payout. On the other side are the mounting costs of debt servicing, food, petrol and electricity, and the confidence-sapping effect of a falling housing market.
"The deciding factor will be the credit crunch," he says. "It is both more expensive and more difficult for banks to get foreign funding. If you get more of a credit squeeze here it turns into potentially quite a nasty situation.
"It's looking dodgy at this stage but it is a tough call to say how long that is going to persist, and whether the Federal Reserve's actions are going to be sufficient to avert the crisis for us."
The export sector has to contend with a slowing world economy and a high exchange rate.
The dollar is high because the current expansion is the longest since the 1960s.
"There is little slack in the economy to cope with increased demand, as the low unemployment rate attests, and the Reserve Bank's only instrument for reducing demand is high interest rates.
"Our interest rates are getting higher when the rest of the world, except for our Australian neighbours, is going in the opposite direction. That tends to make our currency look attractive," says New Zealand Institute of Economic Research director Brent Layton.
"And we have limited scope to grow our way out of this, because we don't have too much spare capacity around and there's not much increasing that capacity.
"Our fundamental problem is that we don't have the policy settings to encourage people to increase the supply side, whether labour or capital."
Deutsche Bank, like ANZ National, expects the economy to grow by just 1 per cent this year. But chief economist Gibbs does not expect the Reserve Bank to loosen its grip much before the end of the year. Neither does he think it should.
Reflating the economy if growth and inflation were to decline faster than expected would be relatively straightforward, he says, but squeezing inflation out of it if the economy proved unexpectedly resilient would be a far more costly and difficult exercise.
Bagrie says that though nobody likes to go through economic downturns, they have a positive side in relieving pressures.
"The housing market is over-valued so it is hard for new buyers to get into it. There's no spare labour about, which makes it harder for firms to expand."
