Prime Minister John Key says the worst slump in retail sales in 17 years is not a sign the economy is heading toward another recession, as the world holds its breath over the possible fallout from the Greek crisis.

The record fall triggered Opposition warnings of a possible double-dip recession. But little more than a week out from the Budget, Mr Key said Treasury and Reserve Bank forecasts showed no signs of a contraction.

"The Budget documents will show we are likely to experience ... reasonably robust levels of growth in 2013-14," he said.

Australia's performance was crucial. Its mining sector was strong but virtually every other part of its economy was weak.

But there was the risk of a slowdown in Europe, which could reverberate around the world.

"If the global conditions are very weak, that can have an impact and we can't rule that out."

In statistics released yesterday, core retail sales volumes were down 2.5 per cent in the first three months of the year, the biggest fall since records began in 1995. Supermarket sales fell 7.4 per cent, also the largest drop on record.

But while the slide was larger than forecast, economists said a dip was expected after the boost from the Rugby World Cup.

Labour's Economic Development spokesman, David Cunliffe, said it was "an ominous warning that a double-dip recession could be on the cards" and was not all explained by the World Cup.

Government policy was also to blame: "It's classic Keynesianism; cut, cut, cut means money cannot circulate and the economy winds down."

With real incomes going backwards and unemployment back up to 6.7 per cent, consumers could not afford to spend.

BNZ economist Craig Ebert said the dip, which saw sales volumes fall 1.5 per cent, was "the natural hangover from the Rugby World Cup" though it was bigger than the market expected. It partly reversed the 4 per cent retail surge in the second half of last year.

The slump in retail data comes as the Government prepares its second "zero Budget" on May 24 against a backdrop of uncertainty in Europe, where several countries are witnessing a backlash against austerity measures.

German Chancellor Angela Merkel, leader of the pro-austerity group, suffered a defeat in the country's biggest region at the hands of the Social Democrats and the Greens, while demonstrations took place in Spain.

Speculation is mounting that Greece will abandon the euro, sparking a banking crisis, after talks failed to resolve the political standoff over spending cuts forced on it as part of a European Union bailout package.

- © Fairfax NZ News

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