The Treasury says the New Zealand economy faces a third quarter of contraction but but maintains growth will return by the end of the year.
In its monthly economic indicators report, Treasury reiterated it's likely the economy experienced a recession in the first half of the year.
It says further contraction in the third quarter cannot be ruled out because of the housing downturn.
The Treasury cites an expected significant fall in residential investment and subdued retail activity in July.
But it still expects growth in the December quarter, due to the combined effect of tax cuts, recovery from the drought and a weakening New Zealand dollar.