An influential survey of business opinion shows the economy contracted in the September quarter after stalling in June.
After contracting 4 per cent in the June Quarterly Survey of Business Opinion, firms' experienced activity fell a further 15 per cent in the September survey.
Seasonally adjusted business confidence fell from a net 26 per cent of respondents positive in June to 9 per cent net pessimistic in September, the first such negative in a year.
The survey is run by the New Zealand Institute of Economic Research (NZIER).
Council of Trade Unions policy director and economist Bill Rosenberg said the report should serve as a 'wake-up' call to the Government.
"The recovery continues to disappoint optimistic expectations. It says that 'business profitability is deteriorating again; highly unusual for this stage of the recovery'."
Rosenberg said tax changes unveiled in this year's Budget would do little to boost the economy.
"It is time the Government took action to ensure we don't go back into recession as the NZIER survey suggests is a real possibility."
NZIER said expectations through the end of the year, while a generally less reliable indicator, also slumped, from a net positive 15 per cent in June for the September quarter, to a net negative 2 per cent for the December quarter.
"There was a synchronised slowdown across regions and sectors," said NZIER principal economist Shamubeel Eaqub . "Construction and financial services slowed most sharply. Manufacturing exports were steady at barely positive."
"Large firms, which had been recovering strongly, fell sharply, and small firms remained in the doldrums. Business profitability is deteriorating again; highly unusual for this stage of the recovery. This may weigh on future hiring and investment - although hiring and investment intentions remain encouragingly resilient" he said.
There was no evidence in this latest survey of any pre-GST consumer spend up.
"The risk of a double dip recession has risen quite a bit," said Eaqub.
Asked of the likelihood, Eaqub said: "I don't know...50/50?"
"Activity contracted and expectations are being revised down," he said. "The recovery continues to disappoint optimistic expectations."
Seasonally adjusted business confidence fell from 26 per cent to -9 per cent, the first negative reading in a year. Renewed weakness in activity, profits and a shallow recovery had depressed business confidence.
Labour market indicators remain resilient, said Eaqub, with actual hiring eased a touch but still consistent with improving hiring.
"Labour is generally becoming harder to find (but a little easier in construction and retailing), which will support wage growth over the next year," he said.
ANZ economist Khoon Goh said today's QSBO survey was "unequivocally weak across the board. Confidence fell in all regions and across all sectors surveyed."
Goh said it was difficult to tell if the Canterbury earthquake was partly to blame, but "it was clear that the economy was losing momentum anyway before the earthquake struck."
"The broad story is one of firms finding conditions very tough, and with limited scope to push through price rises, profitability is taking a hit. No surprise then, that investment intentions were flat, and firms reported a reduction in their workforce."
While today's survey was weaker than expected, Goh said he was still sticking to his call of economic growth of close to 4 per cent for the 2011 calendar year.
Deleveraging - people paying down debt - was continuing to act as a headwind for near-term activity.
"But we still see better prospects next year on the back of increased rural incomes, an unleashing of pent-up demand, earthquake reconstruction work and activity relating to the Rugby World Cup," said Goh.
ASB Bank economist Christina Leung said weak profitability fuelled pessimism amongst firms.
"It appears firms are finding it difficult to pass on rising costs, with a smaller proportion of businesses indicating they intend to raise prices despite the increasing proportion of businesses facing higher costs."
"Further declines in profitability over the coming year may lead businesses to put expansion plans on hold.
NZIER's Eaqub said the renewed economic weakness, distant inflationary pressures and a fragile global setting meant the Reserve Bank would leave the official cash rate on hold until early next year.
-HERALD ONLINE/ BUSINESSDESK