A more cautious tone in the Institute of Economic Research's most recent quarterly survey of business opinion signals a slowdown in economic growth from a sprinter's to a middle-distance runner's sort of pace.

A net 19 per cent of firms expect the general business situation to improve over the next six months, down from a net 32 per cent in June and more than 50 per cent in the two quarters before that.

Confidence, however, remains well above its long-run average, a net 5 per cent negative.

A more reliable indicator of gross domestic product - domestic trading activity - has been stable at a net 14 per cent positive over the past six months, a little better than the long-run average of 11 per cent.


"It is consistent with annual economic growth moderating from 3.8 per cent in the first half of 2014 to a still healthy 2.8 per cent in the second half," said NZIER principal economist Shamubeel Eaqub.

Some loss of momentum was to be expected in the light of higher interest rates, a halving of export dairy prices and falling turnover in the housing market.

Optimism was fading across regions and industries, Eaqub said, albeit from levels higher than the economic numbers would have justified.

The gap between what firms expected in the previous survey and what they reported actually happened three months later had widened again, which suggested some of the moderation in growth has been unexpected and that is likely to lead to more caution in hiring and investment, he said.

Firms reported labour, both skilled and unskilled, had become a little easier to find.

The survey's measures of costs and prices suggested an inflation rate of 2.5 per cent by early next year. Rising cost pressures only partly explained the rise in prices, Eaqub said.

The other part of the explanation was margins expanding from the "razor thin" levels prevailing since the recession.

But despite that a puzzling net 14 per cent of firms reported lower profitability over the past three months.


Another surprising and potentially ominous result from the survey, given the current phase of the business cycle, is a rise in the number of firms citing a want of demand (sales) as the main factor limiting their ability to increase turnover and a fall in the number citing capacity as a constraint.

"Investment intentions look like they are coming off a peak but the levels are still high historically," Eaqub said.

"Investment should be the first thing to fall if capacity is not a problem and profitability is an issue."

Most of the survey responses came in before the general election and before the Reserve Bank's September monetary policy statement confirming that it is on hold.

Two-thirds of the financial services firms surveyed expect interest rates to rise over the next 12 months, where 93 per cent did three months ago.

"This is consistent with consensus forecasts of interest rate increases from early 2015," Eaqub said, though NZIER's own view is that the Reserve Bank will not need to hike until early 2016.

ANZ chief economist Cameron Bagrie said that with the economy now settling into a more moderate growth trajectory - albeit with risks to manage - prospects were for interest rates to remain on hold for the foreseeable future.

"There is still enough on the inflation side to keep us and the Reserve Bank watchful, and question marks will surround the pass through from a lower currency into broader inflation trends in 2015," Bagrie said.

"But the bank is looking increasingly set for an extended sabbatical."