The economy seems to be slowing down
New Zealand is already in a recession, according to a new assessment by the country's Treasury.
The most common definition of a recession defines it as two consecutive three-month periods of contraction.
While final data for the second quarter has yet to be issued, the Treasury said recent financial indicators showed the economy shrank in the quarter to June.
The economy declined by 0.3% in the first quarter of 2008 as demand slowed for New Zealand's exports.
The Treasury predicts flat growth in the third quarter but forecasts a recovery in the last quarter of 2008.
"Domestic demand has weakened and private consumption is expected to have fallen in the June quarter," said the Treasury.
It added that as food and petrol prices rise, spending on more discretionary items has fallen.
"With continuing weak growth, inflation is expected to ease in the medium term," it said.
The country's central bank made its first interest rate cut in five years in July, reducing rates by a quarter of a percentage point to 8% from 8.25%.
Analysts said that the size of the rate cut was limited because of inflationary pressures and fears that lower borrowing costs would accelerate consumer price growth.
However, the rate cut has also weakened the New Zealand dollar, which while helping exports has fanned inflation.
The last time New Zealand had a recession was in 1997-1998, following the Asian financial crisis.