Although there was no surprise to the news that economic activity shrank in the first three months of the year, stock levels for both wholesalers and retailers were much higher than expected.
That indicated the slowdown in domestic demand was causing problems throughout the wider economy.
ANZ-National Bank chief economist Cameron Bagrie said a September start to the Reserve Bank's easing cycle remained on track but he was not discounting the possibility of a move next month.
"We acknowledge that high near-term inflation remains a sticking point to an earlier easing and the Reserve Bank will want to be sure that the slowdown in growth will translate into easing non-tradeable inflation."
The quarterly survey of business opinion by the New Zealand Institute of Economic Research on July 8 was likely to confirm further weakness in the economy and evidence of easing resource pressure.
However, the June quarter inflation release on July 15 was shaping up to be the critical release ahead of the official cash rate review on July 24, Mr Bagrie said.
Statistics New Zealand figures showed economic activity, as measured by gross domestic product (GDP) contracted 0.3% in the March quarter.
Drought conditions in the early part of the year had a noticeable impact with activity in the agriculture industry falling 5.6%.
The drought also had a noticeable effect in food manufacturing which declined 4%.
Mr Bagrie said the 5.6% decline in the construction sector was as expected.
Real estate and business services showed a 0.9% decline which was not surprising given the sharp slowdown in the housing market.
"What is puzzling is the resilience in the retail and hospitality sector which was flat despite a 1.2% decline in retail sales.
"Also puzzling is the ongoing strength in the finance and insurance sector, despite slowing credit growth," he said.
Yesterday's data was in line with Reserve Bank forecasts but the ANZ-National Bank expected the economy to slow by more than the central bank was projecting.
Downward historical revisions suggested the economy was not on as strong a footing as originally thought.
Tax cuts and the strong dairy payout would provide a floor to growth and there would still be a rebound once the effect of the drought dissipated.
"But the risks continue and point to a sharper slowdown in near-term growth," Mr Bagrie said.
