So what's behind the New Zealand's downturn? New Zealand's economy is very dependent on international trade and the ongoing global economic slowdown combined with a severe drought was probably the biggest factors putting downward pressure on the economy. In fact, exports, which make up 30 percent of the $104 billion economy, were down significantly in the last quarter. For example, overseas shipments of goods and services declined 1.8 percent in Q1 as farm production fell 5.6 percent, the biggest decline since 1998.
Also, the Reserve Bank of New Zealand monetary policy is not without blame. The high level of interest rates significantly increased the cost of credit and the cost of living. For instance, household spending, which makes up 60 percent of the economy, fell 0.4 percent from the fourth quarter, the first contraction in four years. Moreover, purchases of durable items declined 3.4 percent, led mostly by cars, furniture and household appliances.