The summer drought is likely to have the economy knocked backwards in the June quarter, possibly down 0.2 per cent, though there is no risk of a slide into recession, economists say.
While the official figures will be "unflattering" for the economy, after subdued growth of just 0.3 per cent in the March quarter, there should be a strong bounce in the September quarter forecasters say.
Official figures for economic growth are due on Thursday. They are expected to show the full damage from a slump in milk production and a drop in livestock slaughter numbers, after a spike up earlier in the year because of the drought.
On the other hand, ASB economists expect a boost from greater retail spending as people buy furniture and electronics for their new homes, underpinned by the stronger housing market.
Last week, the Reserve Bank's Monetary Policy Statement gave a forecast of 0.4 per cent for the June quarter, but that did not include the most up-to-date figures, which were weaker than expected.
Westpac is picking GDP to fall 0.1 per cent in the June quarter, with the drought knocking 0.6 percentage points off the growth figure.
"While the drought had well and truly broken by June, the timing of its effects mean the greatest hit to the level of production occurred over the June quarter," Westpac said.
Agricultural output dropped about 8 per cent according to Westpac estimates, after a 4.7 per cent fall in the March quarter. The big hit was in milk production, down 11 per cent in the three months to the end of June.
As well, there was a near 5 per cent fall in food manufacturing, with falling volumes for dairy and meat processing.
ASB is picking a 0.2 per cent drop in GDP, the same as Bank of New Zealand's forecast last week.
But ASB is predicting a strong rebound in activity in the September quarter, reflecting a recovery in milk production from the slump in the first half of the year. There were also signs earthquake rebuilding was gaining steam in Christchurch, despite recent weak construction figures.
There should also be a boost from more home building in Auckland, ASB said.
HSBC Bank expected a slight positive figure, with growth of 0.2 per cent in the June quarter, taking annual growth to 2.3 per cent, down from an earlier forecast of 2.8 per cent. But it, too, expected a strong bounce in the September quarter.
The economy grew a mild 0.3 per cent in the March quarter, taking annual growth to 2.5 per cent.
Despite still-healthy consumer and business confidence and the Canterbury rebuild, the severe drought is expected to take its toll in the three months to June.
Manufacturing figures out last week showed sales volumes down 3.4 per cent, driven by a 10 per cent slump in meat and dairy processing in the quarter.
As well as that big bite, the previous boost from Census workers would drop out of the equation, Westpac said.
While it forecast a drop in GDP in the June quarter, that did not mean New Zealand was heading back into recession, Westpac said, technically two negative quarters for GDP.
In fact, underlying activity looked to be more robust in the June quarter than the March quarter, Westpac said.
Looking through the impact of the drought, Westpac estimated underlying economic growth of about 0.5 per cent, which was not spectacular, but more broad based than in the March quarter.
That reflected a rise in retail spending and higher non-food manufacturing.
Despite the Christchurch rebuild, construction was flat in the June quarter, according to latest figures. The volume of home building actually fell 1.8 per cent in the June quarter. That was seen as surprising but may be a temporary pause in building.
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