New Zealand business confidence climbed to a 20-year high in the fourth quarter, lifting expectations for profits, hiring and investments, and raising the prospects for inflation to start to accelerate.

A net 52 per cent of businesses were optimistic in the December quarter, seasonally adjusted, the highest since June 1994 and up from 33 per cent three months earlier, which was itself the highest in more than three years, according to the New Zealand Institute of Economic Research's Quarterly Survey of Business Opinion.

Domestic trading activity, which is closely aligned with economic growth, climbed to the strongest since March 2005, with a seasonally adjusted net 15 per cent of firms experiencing a pickup in their own activity. Expectations for the coming quarter rose to 32 per cent from 24 per cent.

"This quarter every region in our survey was doing better," said Shamubeel Eaqub, principal economist at NZIER. "Until recently much of the recovery was concentrated in Canterbury. This has now broadened to most regions across New Zealand, which points towards a more sustainable and stable recovery."


The survey comes as economists bet the central bank will raise interest rates in the first quarter, lifting the official cash rate from a record low 2.5 per cent to cool inflation pressures in what some economists have called a 'rock star economy'.

The economy is picking up faster than the Reserve Bank assumed, said Westpac senior economist Michael Gordon.

"Our view remains that the RBNZ will begin raising the OCR in March, using its next review on 30 January to signal such a move, with five 25bp hikes over the course of this year," Gordon said.

Those that lifted hiring in the latest quarter rose to a net 7 per cent from 1 per cent, while for the coming quarter hiring intentions slipped to 12 per cent from 17 per cent.

Those reporting ease in finding labour deteriorated to 30 per cent from 29 per cent for skilled workers and worsened to 10 per cent from 45; 5 per cent for unskilled workers. Much of the pressure is in Canterbury.

The long-run average is 16 per cent for skilled labour and a net 15 per cent for unskilled.

The survey was taken before December 15, meaning it hasn't captured the pickup in retail activity over the peak Christmas-New Year period, though merchants still reported the strongest retail sales since September 2002, with those reporting higher sales jumping to 20 per cent from 2 per cent while orders placed over seas rose to 18 per cent from 5 per cent.

Price pressure remained relatively subdued, Eaqub said. Those reporting a rise in average costs slipped to a net 21 per cent from 22 per cent and expectations for the coming quarter fell to 18 per cent from 26 per cent. At the same time, those reporting a rise in selling prices rose to 10 per cent from 8 per cent and for the coming quarter held steady at 24 per cent.

"Firms intend to raise prices in coming quarters due to increasing capacity pressures and strengthening economic growth," Eaqub said. "Capacity constraints are most pronounced in Canterbury, but are starting to emerge in other regions too."

Capacity utilisation slipped to 90.2 per cent from 91 per cent three months earlier, while those seeing capacity constraint climbed to 12.7 per cent from 10.8 per cent.

Those seeing profit growth turned positive, just in the latest quarter, at a net 1 per cent from 8 per cent in the third quarter. For the coming quarter, a net 16 per cent saw profit growth from 12 per cent three months earlier.

Investment intentions for buildings rose to a net 7 per cent from 3 per cent and on plant and machinery those planning to invest more jumped to 18 per cent from 8 per cent.