Survey after survey has shown economic activity falling throughout the year.
Official gross domestic product (GDP) figures for the June quarter will not be out until next month, but in its monthly overview of July economic indicators Treasury said it believed the economy had contracted for the second successive quarter.
Two quarters of GDP contraction are considered a technical recession.
"Growth is expected to pick up in the December 2008 quarter owing to the combined effects of tax cuts on October 1, 2008, recovery from the drought, high export prices, the weakening New Zealand dollar and more reductions in the official cash rate," Treasury said.
Economic growth in the 2008 calendar year was expected to fall below previous forecasts, coming in at between 0.5% and 0.75% of GDP.
Economic indicators in July were bleak, the report said.
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.
Otago Chamber of Commerce chief executive John Christie said business confidence among survey members remained well below the levels experienced for at least the past six years.
The latest survey, released yesterday, showed 60.5% of respondents expected the New Zealand business situation to get worse, and only 38.9% expected their business to stay the same or improve - down from 44.9% in April.
The survey identified high costs, including fuel and staffing, as the predominant issue affecting business profitability in the last six months.
Fuel costs were also recorded by employers as their highest concern for the next six months, with inflation being flagged as more of a concern for respondents than staffing costs, he said.
The survey showed it was easer to get staff, both skilled and unskilled.
"Businesses have also indicated generally they are not looking to increase part-time or full-time staff levels. This is a significant turn around from six months ago, when there was still demand for more staff."
Businesses were experiencing lower profitability, due mainly to the increased costs associated with fuel prices, staff costs, interest rate rises and lower sales.
The June period traditionally showed falls in profitability and expected sales.
The latest survey was significant due to the number of respondents who had noticed a decrease in both those indicators, with 53.3% and 29.9% recorded respectively.
Finance Minister Michael Cullen added his weight to the seriousness of the problems facing the economy.
"Since 2000, New Zealand has experienced the longest period of economic growth since World War II.
"But even after that strong growth and having achieved one of the world's lowest unemployment rates, we cannot expect to be immune from a serious global financial storm."
Bank of New Zealand research economist Stephen Toplis said overall expectations for businesses' own activity were consistent with his GDP growth expectations.
"But for them to remain so, business expectations will now need to start pushing higher.
In light of falling petrol prices, the drop in interest rates and the exchange rate, and upcoming tax cuts, this is certainly plausible."
But there was a risk that it would not happen, particularly given that profits were under so much pressure.
Pricing intentions were rising strongly for the business community, and they were now at their strongest level since December 2000, he said.
However, the intention to raise prices was one thing but the ability to do so was another.
The desire expressed by retailers to push prices up was particularly strong, but that had to be compared with the reality of the heavy discounting currently being witnessed "downtown".
"What all this means is that it's business that takes more than its share of the pricing pain via a decline in profits as opposed to households through paying increased selling prices," Mr Toplis said.
