The economy has for months teetered on the verge of recession, with consumer sentiment weighed by high prices, elevated borrowing costs and a housing crisis.

But the latest figures showed gross domestic product fell a bigger-than-expected 1 percent in the July-September period from the previous three months. 

Analysts had forecast a contraction of 0.2 percent.

That marked the second quarterly contraction in a row, after shrinking a revised 1.1 percent in the April-June quarter.

"Yes, the 1 percent decline in activity is huge. And it's much weaker than anyone had anticipated," said a report by Kiwibank economics.

Excluding an economic decline during the COVID-19 pandemic, the New Zealand economy had posted the weakest six-month period since 1991, it said.

"And weakness is spreading across most industries," the report said.

However, the recent drop was partly balanced out by a statistical revision of growth upwards earlier in the year, Kiwibank said.

And the latest quarter may be the last in the cycle of decline, it said, with a one percent cut in interest rates over the latest quarter likely to provide relief going forward.

The New Zealand dollar was trading in the late afternoon at US$0.5626 -- down about 1.8 percent from the previous day -- as the scale of the slump took traders by surprise.

"The latest economic figures highlight the importance of the steps the government has taken to restore respect for taxpayers money and drive economic growth," the government said in a statement.

Finance Minister Nicola Willis said the economy had now contracted for eight quarters on a per-capita basis.

"The decline reflects the impact of high inflation on the economy. That led the Reserve Bank to engineer a recession which has stifled growth," she said.

But she predicted the economy would pick up in the next quarter, and grow more strongly in 2025.

The opposition Labour Party said the recession was of the finance minister's making.

"Nicola Willis' cuts and austerity has fed the recessionary fire," said Labour finance spokesperson Barbara Edmonds.

"There's no creative accounting that Nicola can do to make these GDP figures better."

The slowdown could be bad news for the job market, New Zealand's Council of Trade Unions said.

"This isn't a wake-up call for the government, it's an alarm," said the council's economist, Craig Renney.

"The economic situation is even worse than we thought, and that means even more hardship for workers heading into Christmas."