New Zealand's economy may struggle to pick up this year, with a leading activity survey suggesting uncertainty continues to hold back investment.
On Tuesday the Institute of Economic Research released its closely followed quarterly survey of business opinion (QSBO) which pointed to a modest improvement in the mood of New Zealand business.
Overall business confidence remained negative, nevertheless the net 26 per cent of businesses expecting conditions to deteriorate over the coming year was the most positive reading in the survey in 12 months.
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Most areas of the survey showed at least a marginal improvement, with all of the business sub-categories more upbeat.
Manufacturing - the most pessimistic sector in the September QSBO - in particular recovered strongly, with the balance of companies reporting a pickup in output at the end of 2019.
While the building industry reported a fall in new orders, architects reported a sharp improvement in orders for residential, commercial and government projects, suggesting conditions may soon improve.
In the September survey the bulk of manufacturers were pointing to a slowdown in export orders, but the December survey showed most businesses seeing a pick up in exports.
But the QSBO appeared to point to tepid growth, with the bounce back in confidence less pronounced than the monthly ANZ business outlook surveys from the end of 2019.
Economic indicators appeared to improve at the end of 2019 after a lengthy, gradual slowdown. Activity indicators in the latest QSBO suggested any pick up in growth is likely to be very gradual.
Asked about their experienced activity - which tends to be a much better gauge of economic growth than general confidence - revealed a net 11 per cent of businesses had seen conditions deteriorate in the past three months, a repeat of the September figure.
NZIER principal economist Christina Leung said the weak own activity measure pointed to annual growth of 1 per cent at the end of 2019. The survey was an improvement, but only just.
"To the extent that we're seeing a stabilisation in conditions, that suggests this is as bad as it gets," Leung said.
Investment intentions among businesses remain weak, with more businesses expecting to cut spending on new buildings or plant and machinery than expect to increase.
Meanwhile, profitability remains under pressure, as companies struggle to pass on higher costs through price increases. A net 28 per cent of companies said profits fell at the end of 2019, around the same as three months earlier, while a net 16 per cent expect profits to drop in the coming months.
"While businesses have been increasing prices for their outputs, costs have been rising more rapidly," Westpac economist Satish Ranchhod said.
"The resulting squeeze on profits is likely to continue in the new year."
ASB senior economist Jane Turner said the survey represented a small improvement in confidence, but it may not be enough to help growth pick up.
"QSBO shows a corner has been turned but it's not as sharp a turn as we would like to see," Turner said.
ASB has forecast that growth will drop to a low of 1.5 per cent in December 2019, before gradually recovering, although this was driven by an expectation of a recovery in business confidence.
"In terms of a trough in growth I think we're still at or about the lull."
Turner said the concerning aspect of the QSBO was in the labour market, with employment appearing to fall for the third straight survey.
"If that slows [further] and it has a flow-on effect on consumer spending ... you're suddenly getting a headwind to recovery."
BNZ head of research Stephen Toplis said the QSBO suggested New Zealand's economic growth had reached its trough, "it just doesn't look like we're bouncing off it very quickly".
Toplis expects growth to "muddle along" at 2-2.5 per cent, but this would represent good conditions in an economy with such low unemployment.
"If we can continue along like this, it's actually quite a pleasant outlook. We continue with 2-2.5 per cent growth, inflation at 2 per cent, an unemployment rate at about 4 per cent, is that a bad situation to be in?"