The bank's chief economist, Cameron Bagrie, said the latest business outlook survey showed growth had stalled and prospects looked weak for the rest of the year, but he was loath to call it a recession.
The economy was in for a tough year, but nothing it had not endured before.
The economy had been bingeing on borrowed money, the current account deficit was high, there was pressure from inflation, people had invested too heavily in housing and there would now be a period of correction, or what he called tough love.
It would not be a quick fix and for those who had borrowed heavily, there would be some pain, he warned.
The correction was likely to last well into 2009 and the next upswing in the business cycle was not expected until 2010.
"The more you drink, the bigger the hangover and we've been bingeing,'' Mr Bagrie said in an interview.
While describing the survey results as "grim reading'', he said there were some positive aspects for business, with inflationary and labour market pressure all likely to ease, giving the Reserve Bank room to lower interest rates with the exchange rate also likely to fall.
"Eventually, we will get through the tough love period. We could see through the curve the Reserve Bank cut interest rates and that will underwrite another upturn in the business cycle.
"Trouble is, that's a couple of years away".
While calling it a normal business cycle, Mr Bagrie said the survey showed that confidence was weak across all sectors surveyed - retailing, manufacturing, agriculture, construction and services.
Mr Bagrie said of most concern was the negative expectations companies had about their own business activities, a trend which had been recorded just 12 times in the survey's 20-year history and the last time they were this weak was in 1991.
"A net 6% of businesses expect a deterioration in their own business over the coming year, down from a net plus 2% the previous month,'' he said.
Employment, profit expectations and investment intentions were all down in the latest survey, and export intentions were at levels last seen during the 1998 Asian crisis.
Mr Bagrie said employment intentions had been weak for two consecutive months, indicating a softening in demand for staff.
Construction was the most pessimistic sector, with residential construction intentions reaching a historic low and commercial activity faring little better.
Mr Bagrie said he refused to call it a recession, saying there was a risk we "wrap ourselves in further palls of gloom''.
People would find it tough, but a correction was inevitable given the unsustainable growth the country had been experiencing.
"We need to be cognisant of the end game. We will be better off in four to five years, because New Zealand has been on an unsustainable growth path".
