The world depression of the early thirties set back the low level of manufacturing that had developed. Export returns fell 40 per cent between March 1929 and March 1931. National income fell from £150 million in 1929 to £100 million in 1932, and for the two years between 1931 and 1933 registered unemployed men over 20 years of age exceeded 70,000, with the record, 79,500 (14 per cent of the labour force) being reached in October 1933. Unemployed men under 20 and unemployed women were not counted, but they were sufficient in number to bring total unemployment to over 20 per cent of all those who wanted to work. It was not surprising, therefore, that the volume of manufacturing output fell between 1929 and 1931, with no measures to sustain internal demand and with decreased prices for competing imported manufactured goods. Manufacturing output did not regain the 1929 volume until 1935.

The following table shows the effect of the depression on employment and on value of manufacturing output (except primary produce processing) in the March years 1930 to 1933.

Because prices fell during these years, the fall in volume of output is not strictly comparable with the fall in the value figures. Between 1930 and 1933 the volume fall was about 20 per cent as compared with a value fall of over 30 per cent. Nevertheless, in most industries the physical volume of production was reduced, often substantially. For example, between 1929 and 1931–32 the number of suits manufactured annually in New Zealand was reduced from 166,000 to 114,400, a fall of 30 per cent; and between 1929–30 and 1932–33 the output of children's boots and shoes fell from 120,000 pairs to 88,000 pairs, a fall of 27 per cent. The output of house-building timber was reduced from 72 million ft to 36 million ft between 1929–30 and 1931–32.

Even during the depression a few new industries were established and some others grew considerably. Among the most important established in the early thirties were the plastics and the rubber-manufacturing industries. Other new industries produced electric batteries, electric ranges, gas meters, lawn mowers, and wooden matches. Considerable expansion took place in proprietary medicines and toilet preparations, radio sets and cabinets, and slipper making and silk-rayon hosiery. It is of interest to note not only the increasing diversification, but also the increasing reliance on imported raw materials in most of the new and the expanding industries. Both trends were later to become more noticeable.

From 1934, with a rise in export prices, New Zealand began to move very slowly out of the depression. The dimensions of the recovery are shown by the following table, which shows employment and output (by value) in manufacturing for the years 1933 to 1935.

The recovery of manufacturing was further assisted after 1935 by increased payments to those who were unemployed, by greater State expenditure on development, and by a more expansionist financial policy. For the depression had shown that many of the old assumptions about the New Zealand economy were no longer valid. It was no longer possible to accept the comfortable belief that an adequate standard of living could be provided for most of the people merely by selling farm products abroad and by importing manufactured goods. People began to realise that manufacturing would have to be developed to keep them employed. Thus the Industrial Efficiency Act of 1936 aimed at promoting “the economic welfare of New Zealand by providing for the promotion of new industries in the most economic form and by so regulating the general organisation, development, and operation of industries that a general measure of industrial efficiency will be secured”. Although the Act was used largely for regulation rather than for industrial development, the importance of the explicit statement of its aims should not be overlooked.

A fall in the country's overseas exchange reserves, which began in 1936–37 and continued during 1938, had a marked effect on local manufacturing. It was caused partly by a fall in export prices, partly by the higher demand for imports brought about by the economic expansion, and partly by capital movements from New Zealand. In November 1938 net overseas assets had fallen to £(N.Z.)8,000,000 (compared with the 1936 average of £(N.Z.)29,000,000) and, in December 1938, import licensing and exchange-control regulations were introduced. Under these regulations economies in import expenditure were made in almost all fields and the manufacturing industries were given the chance of filling the gap. But the Second World War broke out before these measures could themselves influence the course of industrialisation.