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Statistics New Zealand has confirmed however, market expectations that the first half of 2008 was a weak period for the economy.

Statistics New Zealand reported this morning that the production-based measure of gross domestic product contracted by 0.2 per cent on-quarter in the three months to June 30, compared with the market's median expectation for a 0.5 per cent contraction.

The pace of annual average growth in GDP for the 12 months to June 30 stood at 2.6 per cent, compared with an upwardly revised 3.2 per cent in the 12 months to March 31, 2008.

"Economic commentators have known since late last year that the first two quarters of 2008 were likely to be a period of disappointing growth on the back of the serious international economic situation and local drought.

"We started this year having to adjust to very real challenges arising from the combination of slowing global growth, rising international oil and food prices and rising credit costs in the wake of the ‘credit crunch' in the United States. These challenges were not of New Zealanders' making, but we have come through this challenging patch and are on our way back to growth supported by a number of positives.

"The positives include the fact that we entered this period with one of the lowest unemployment rates among the rich, developed nations and one of the world's strongest sets of Government accounts, factors that mean New Zealand will be protected from this externally-driven shock to our economy.

"The positives include the growth-enhancing effects of the Government's decision to cut the company tax rate in April, the same time that rolled out the research and development tax credit scheme to reward firms' investment in innovation," Dr Cullen said.

The positives also include the Budget's strong investment in social services and in infrastructure that took effect from July 1, and the extension of tax relief for families and the reduction in personal income tax rates, that take effect on Wednesday next week.

Commentators anticipate that New Zealand's terms of trade will remain at historically strong levels on the back of rising demand in emerging economies, particularly in Asia.

"It is disappointing that the economy was weak in the first half of 2008. It is important to remember, however, that this is a temporary disappointment driven by an unusual set of negative overseas economic developments and that New Zealand's economic and social prospects are healthy and strong," Dr Cullen said.

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