Wellington  - New Zealand's economy shrank by 0.3 per cent in the first quarter, according to official figures released Friday, confirming analysts' fears that the country is heading into recession.

The drop in gross domestic product (GDP), as reported by Statistics New Zealand, was in line with market predictions, and economists' attention is now focussed on whether GDP will also contract in the June quarter, which would meets the technical definition of a recession.

Despite the quarterly contraction, the economy grew by 3 per cent over the previous 12 months, after Statistics New Zealand revised down its figure for growth in the December quarter from 1 per cent to 0.8 per cent.

Finance Minister Michael Cullen described the March quarter decline as a "temporary disappointment driven by an unusual set of negative overseas economic developments."

He said that New Zealand's medium-term economic and social prospects were "very healthy and strong."

"After the spectacular employment and economic growth of the past eight years, we started this year having to adjust to very real challenges arising from the combination of slowing global growth, rising international oil and food prices and rising credit costs in the wake of the credit crunch in the United States," Cullen said.

Those challenges were not of New Zealand's making, he said, and with unemployment at 3.6 per cent, one of the lowest rates among developed nations, the country was better positioned than many others during "this temporary, externally driven shock to our economy."

Falling activity in the vital agriculture industry and the construction sector were the main contributors to the March quarter decline, Statistics New Zealand said.

The figures came as the local stockmarket slumped to its lowest level since December 2005 after a series of profit downgrades from retailers.

Economists said they would put more pressure on the central bank to cut its benchmark interest rate from the current 8.25 per cent, when it reviews monetary policy next month. (dpa)