The economy is heavily reliant on agriculture, but also has strong links to the international system
The New Zealand statistics agency says the economy has gone into recession for the first time since 1998.
Gross domestic product shrank 0.3% in the first quarter, and 0.2% in the second quarter this year. But annual growth until June remained positive.
Economists define recession as two straight quarters of economic decline.
New Zealand is suffering from the global credit crunch, rising food and fuel prices, and drought which cut production in agricultural industries.
Economists said the second quarter decline was less than expected, but GDP will probably shrink again in the third quarter.
Despite the dip into recession, average economic growth for the year to June still amounted to 2.6%, the government agency said.
Finance Minister Michael Cullen said a return to positive growth was likely by the end of the year.
"We started this year having to adjust to very real challenges arising from the combination of slowing global growth, rising international oil and food prices and rising credit costs in the wake of the credit crunch in the United States," Mr Cullen said.
"These challenges were not of New Zealanders' making, but we have come through this challenging patch and are on our way back to growth supported by a number of positives," he said.
Prime Minister Helen Clark's government faces general elections in November and is lagging in most polls.