New Zealand is not facing a recession but households need tax cuts to cope with a global slowdown, National leader John Key has said.
Finance Minister Michael Cullen yesterday said a technical recession - negative growth over two quarters - could not be ruled out in the face of a weakening housing market, a drought in parts of the country and market turmoil due to the international credit crunch.
His warning followed the Bank of New Zealand comments on Friday that the economy was being hit by a "perfect storm" that would probably blow it into recession.
However, Mr Key today refused to characterise the situation as a recession.
"I think what we do know is we are in a very fragile economic environment," he told Radio New Zealand.
New Zealand was facing the impact of a global slowdown and was vulnerable because of its reliance on borrowing from overseas, he said.
"That's our big issue - that we are not immune from this credit crunch, in fact far from it, and it's not just simply a matter of the Reserve Bank cutting the official cash rate.
"The reality is it's the rate at which the banks source their borrowing from overseas and therefore the rate they lend it in New Zealand.
"That is going to be problematic both in the quantity and the price of that lending."
Mr Key said a National government would bring in tax cuts to help households cope with tougher circumstances.
"Absolutely they are needed."
He criticised Labour for being undisciplined and said it should follow Australian Prime Minister Kevin Rudd's lead.
"We should be taking a leaf out of what Kevin Rudd's doing in Australia, sensible things, cutting taxes but also reviewing expenditure. Where it's of low priority he's trimming that expenditure."
In Parliament yesterday, Mr Key said he hoped predictions of a recession were wrong, but that people struggling to pay their mortgage, fill up their car and put food on the table needed to know the Government was tightening its belt too.
"I think it's irrelevant what term you want to put on the economic slowdown, what we do know is that our economy is exposed ... and that's something the New Zealand Government should be responding to."
Prime Minister Helen Clark responded by saying Labour would not do what a National-led government did when it hit economic "heavy weather" in 1998 - cut New Zealand superannuation and sell a state asset.
Experts are divided on the whether the US financial crisis will send New Zealand's economy into a slump.
One forecasting agency, BERL, has said recession talk is premature grandstanding.
The agency has warned of the dangers of dire predictions, pointing out that several predicted downturns over the past four years have not happened.
"We now see an inglorious rush to be the first to confirm that the New Zealand economy is now in recession," BERL economist Ganesh Nana said.
"We are not part of that rush."
But BNZ economists believe a contraction is not only on the cards, but that the country may already be in it.
Concern is now growing about what effect events in the United States might have on New Zealand's economy, as a wave of negative sentiment spreads around world markets.
The Federal Reserve slashed a key US interest rate by three-quarters of a percentage point this morning (NZ time), a substantial cut but smaller than many in financial markets had expected.
International concern has also been fed this week by a fire sale of US bank Bear Stearns, which suffered fallout from exposure to a sharp decline in the US housing market.
This is the same decline which has made it more expensive for New Zealand's banks to borrow money from overseas lenders.
That has resulted in local mortgage rates rising despite Reserve Bank Governor Alan Bollard not adjusting the official cash rate.
Yesterday, Nobel Prize-winning economist and former World Bank chief Joseph Stiglitz - in Auckland to speak at a seminar - predicted the US crisis would get much worse.
He also criticised the Reserve Bank of New Zealand for focusing on curbing inflation, saying this was "exactly the wrong mandate" for a small open economy.
But while there is no doubt the US economy is struggling, there is a variety of views on how New Zealand might navigate the turbulence.
A feeling is developing that if there is a recession, it is likely to be small - something Dr Cullen was keen to emphasise yesterday.
"A recession is two successive quarters of negative growth - it could be minus 0.1 and minus 0.1," he said.
"I think that when people hear the word, they think of depression and something long, sustained and with large increases in unemployment.
"I don't see the prospect of that."
New Zealand's strong job market is one reason the fallout from the US could be limited, and BERL says strong dairy prices and local oil exports are also underpinning the economy.
It is possible that personal tax cuts could also add some stimulation to the economy as Labour and National enter this year's election campaign.
The New Zealand sharemarket closed lower yesterday for its third consecutive session, but the losses were far smaller than on Monday and Friday, when stocks plunged 2 per cent.
Broker Kevin Rendell, of Wellington firm Gould, Steele and Co said sharemarkets around the world were in uncharted territory.
"Probably, if anything, it's closer to the early 70s bear market that resulted from the oil shock, rather than what we saw in 87, the end of the tech boom, or even the Asian crisis in that it's a sustained fall and the thing that created the shock has been totally disruptive to normal business activity.
"There were several false dawns in that bear market ... It probably took 18 months to work its way through."
- With agencies