New Zealand firms became more pessimistic in the second quarter as the nation's economic recovery lagged behind expectations, according to the New Zealand Institute of Economic Research.

A net 1 per cent of firms surveyed in the NZIER's latest quarterly survey of business opinion were pessimistic about the general business situation, compared to a net 24 per cent of optimists in the previous period.

Their experienced trading activity edged up to 1 per cent from zero per cent in the previous quarter. The survey is consistent with annual gross domestic product growth of 2 per cent.

"Expectations continue to be really positive, but reality still is not keeping pace," principal economist Shamubeel Eaqub told a briefing in Wellington.


"People keep expecting the recovery to get back to the old way, but that hasn't happened."

New Zealand's economy grew at a pace of 1.1 per cent in the first three months of the year, the fastest quarterly pace in five years, as increased milk production stoked dairy manufacturing.

Eaqub said Canterbury is showing encouraging signs as the reconstruction effort begins to take off, though the rest of the nation is showing little evidence of improvement.

"There is encouraging evidence of a rebound in Canterbury following the earthquakes," he said. "The recovery has stagnated in the rest of the economy."

A net negative 6 per cent of financial services firms expect rates to rise in the coming year, compared to a net 57 per cent in the previous quarter, indicating companies are picking rates to stay low, and Eaqub isn't picking the Reserve Bank to raise rates until 2014.

"The current rate is inappropriately high," Eaqub said. A lower benchmark interest rate "might take the edge of the currency, which I think might be helpful to the New Zealand economy."

Last month, the Reserve Bank kept the official cash rate at a record-low 2.5 per cent due to the uncertainty over Europe's sovereign debt woes.

Eaqub said capacity utilisation pressures are beginning to emerge in Canterbury, but there's spare capacity through the rest of the nation. That's reducing inflation pressures, and retailers are showing "outright deflation," he said.


The building industry's new orders improved to a net 12 per cent from a negative 7 per cent on the back of the Canterbury rebuild, while output improved to 16 per cent from a negative 11 per cent.

Manufacturers' experienced output declined to a negative 3 per cent from a net 3 per cent in the previous quarter, though experienced exports improved to a net 12 per cent from a net 10 per cent.

Labour indicators deteriorated, with employment falling to a negative 3 per cent from a net 1 per cent in the previous quarter, while intentions slipped to a net 4 per cent from a net 5 per cent.

"Employment indicators weakened outside Canterbury, and it's still the case that this recovery is very shallow and flat," he said.

Firms' expected profit improved to a net negative 13 per cent from negative 15 per cent, while expected profit deteriorated to a negative 2 per cent from a net 4 per cent.