The economic downturn could get worse - before it gets better

That's the Reserve Bank's view in its latest semi-annual Financial Stability Report.

It says households are reducing discretionary spending - and businesses have put investment plans on hold.

Business confidence is recovering as inflation and interest rates fall, but there is a risk of "significant further weakening" in the economy.

The Bank says the banking sector remains in a good position to support households and businesses, including effectively handling any potential loan defaults.