KEY POINTS:
Treasury has added to voices saying the economy is in recession, but tax cuts and further rate cuts may provide a boost later this year.
Official GDP figures for the June quarter are not out until next month, but in its monthly overview of July economic indicators, the Treasury said it believed the economy has contracted for the second successive quarter.
Two quarters of GDP contraction are considered a technical recession.
Treasury's view adds to a growing body of opinion that the economy is in recession, and it says things might not improve until towards the end of the year.
Finance Minister Michael Cullen believed it would be short-lived.
"While we've been through this flat period as a number of other developed countries have, particularly those with high levels of investment in the property sector ... things are looking better for the latter part of this year," he told reporters.
Treasury said the pick up would be in the December quarter and off the back of the October 1 tax cuts, recovery from the drought, and a weaker dollar and more reductions in the Official Cash Rate (OCR).
The report said it expected economic growth in the 2008 calendar year to fall below previous forecasts, coming in at between 0.5 and 0.75 per cent of GDP.
Recent economic indicators were bleak, with declines in business activity, consumer confidence and domestic demand, continued weakness in house sales, and rising inflation.
"In a softening economy, people will be very hesitant about price increases and other things, so that's given us enough room to cut (interest rates)," Reserve Bank Governor Alan Bollard told Radio New Zealand today.
Last month, the Reserve Bank dropped interest rates to 8 per cent, after having held the OCR at 8.25 per cent for a year.
"We have said that we have room to cut - actually we're in a better position than most OECD countries because we've done what we think is the right thing and we increased during good times."
The central bank has spent the last five years of a 10-year growth period increasing the OCR to tackle inflationary pressures, compared with the loose monetary policy in many OECD countries experiencing similar growth.
Reserve Bank concerns included the highest international prices for food and oil in at least 30 years, the subprime crisis in the United States and its spinoffs, and the effect of the housing market coming off with "quite a thump".
While inflation was nasty, and likely to get worse next quarter, it was forecast to then return within the Reserve Bank's target band of 1-3 per cent, Bollard said.
Markets were contemplating the possibility of a 50-basis point rate cut at the Reserve Bank's next meeting in September, ANZ economists said yesterday.
However, a move of 50 basis points was a "tall ask" given Bollard's track record of moving in 25-point adjustments, and realities on the inflation front.
-NZPA
