Finance Minister Michael Cullen says while Treasury has said the economy is in recession there is light at the end of the tunnel for later this year.
Official GDP figures for the June quarter won't be 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 of last month's indicators add to a growing body of opinion the economy is in recession and it says things might not improve until towards the end of the year.
Dr 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.
Dr Cullen agreed.
"The tax cuts coming in 1 October will feed some demand back into the economy, the drought's over – the drought was quite a big impact on the two quarters this year. . . so expansion should pick up," he said.
"The dollar's come back somewhat so that'll be help in the export sector starting to feed through. The export sector was quite a strong contributor to negative growth in the first two quarters of this year."
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 percent of GDP.
It said economic indicators in July were bleak.
Business activity was down in the June quarter and more firms were expecting it to drop in the September quarter. Cost pressures had risen and profitability had declined.
Consumer confidence had declined in July and weak electronic card transactions data suggested retail sales were soft in June.
Domestic demand had weakened and private spending was expected to fall in the June quarter due to food and petrol price rises.
May retail sales figures showed a fall on the back of a sharp dip in motor vehicle sales.
House sales remained weak and building consents fell further in June.
Falling exports and higher imports also pointed to weak GDP growth in the quarter.
Consumer price inflation rose to 4 percent in the year to June, greater than forecast at the budget update and annual inflation was expected to peak at around 5 percent in September 2008.
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