By Vernon Small

deputy political editor

With Prime Minister Jenny Shipley poised to set the election date, National tried to smile through the pain as the economy delivered the Government a second body-blow in two days.

Hard on the heels of Thursday's sharp deterioration in the current account deficit, Statistics NZ said yesterday that the economy shrank 0.3 per cent in the June quarter.

The New Zealand dollar plunged three-quarters of a US cent to US51.5c and 90-day interest rates dropped to 4.88 per cent, from 5.04 per cent, on the news.


Analysts had expected the economy to grow by about 0.5 per cent in the quarter.

Labour leader Helen Clark said the contraction in June was further proof that "the end is nigh" for National.

Mrs Shipley will announce the election date tomorrow afternoon, after a special meeting of her MPs in Auckland.

Opinion within National is divided between an early-November election, to cash in on the feel-good factor from Apec, and a late-November poll, allowing more time to close the gap on the Opposition.

Labour finance spokesman Michael Cullen said the GDP figures, while subject to revision, did nothing to support National's claims that economic recovery was strong.

"Any plans National had to campaign on its economic record are now ridiculous," he said.

"Its bankruptcy of ideas stands cruelly exposed."

Alliance leader Jim Anderton said no Government could be re-elected on such dismal economic figures.

National's ally Act said the figures reinforced the need for a drop in the top tax rates to 20 per cent over five years.

Act finance spokesman Rodney Hide said the Government should stop dithering and lower corporate taxes in line with Australia.

But Treasurer Bill English put a brave face on the numbers, saying business should not allow the surprise contraction to damage confidence in growth over the next three years.

GDP data for the three months to June showed export volumes fell and primary and manufacturing sectors went into reverse.

Fishing, forestry and mining together fell 8.4 per cent.

Mr English said a 4.8 per cent drop in exports was caused by the delayed impact of the drought.

But conditions were right for growth with low interest rates, a competitive exchange rate and an improving world outlook.

His view was shared by WestpacTrust economists who saw the recovery as firmly on track.

Mr English said there were signs that high levels of imports may come from businesses building up stock levels and that may act as a buffer against future import demand.

Economists, who had expected exports to fall, were surprised by how widespread the weakness was in the domestic economy and even the previously bullish services sector.

Deutsche Bank economists said that while the data had "unambiguously lessened" the prospect of a rise in interest rates by the Reserve Bank in November, such a move was not yet off the agenda.

Other commentators said that a rise in rates by the bank remained likely because it took a longer-term view and growth was expected to pick up next year.