Key Points:

Economists expect the New Zealand economy to shrink by up to 1.2 per cent this year and the unemployment rate to climb above 6 per cent.

Bank economists have updated forecasts for the New Zealand economy over the past week and they make dispiriting reading.

The Bank of New Zealand expects the economy to contract 0.9 per cent this year, ANZ National 1.1 per cent and Westpac 1.2 per cent.

They predict employment will fall.

"We envisage a net loss of around 50,000 jobs through 2009, which will push the unemployment rate to 6.5 per cent by the end of the year," BNZ economist Craig Ebert said.

ANZ National and Westpac are picking 6.6 and 6.4 per cent respectively.

New Zealand's 14 largest trading partners, which have grown by an average 3.1 per cent a year over the past 10 years, are now expected to contract this year. Dairy farmers' incomes will be casualties of the general commodities crash.

"The dairy payout will do well to have a $5 in front of it," Ebert said.

"But export prices for meat, horticulture and seafood have held up reasonably well - so far - when translated into New Zealand dollars."

ANZ National chief economist Cameron Bagrie warns that with farm incomes set to fall, we could see a sharp fall in rural land prices.

In the housing market, Westpac chief economist Brendan O'Donovan sees signs that sentiment has started to improve, courtesy of lower mortgage rates. Turnover is off its lows and it does not take quite as long as it did to sell a house.

But that has to offset rising unemployment and banks' heightened conservatism about how much they lend and to whom. On balance he expects a further 5 per cent decline in average house prices this year, on top of an 8 per cent fall last year.

Bagrie said that was a big wake-up call for people whose spending binge had been based on the assumption that house prices never fell.

"Falling household net worth, driven by lower house prices, risk creating a vicious circle where households seek to save more to compensate.

"The resulting reduction in consumer spending will lead to lower activity and profits, less employment, further falls in house prices and so on," he said.

The BNZ economists expect further support for the housing market from a rise, possibly a strong one, in net immigration as expatriates return and fewer Kiwis leave for the not-so-green pastures overseas.

The tourism sector, meanwhile, is expected to find the going tougher. A lower dollar and cheaper air fares as the oil prices plunges will help, Westpac says, but will not be enough to offset lower global incomes and wealth.

The BNZ is forecasting business investment to fall 12 per cent this year as profits are squeezed and firms' confidence falls to historic lows.

"This is why the Government response to this recession should get a lot of bang for its buck from directly helping the business sector through these difficult times," Ebert said.

Economy: - 0.9 per cent
Unemployment: 6.5 per cent

ANZ National
Economy: -1.1 per cent
Unemployment: 6.6 per cent

Economy: -1.2 per cent
Unemployment: 6.4 per cent