A net 1 percent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect general business conditions to deteriorate, turning from an optimistic net 13 percent reading three months earlier.

A net 18 percent of firms experienced better trading activity, unchanged from December, while just 6 percent anticipate a pick up in trading compared to 20 percent three months earlier.

"A key driver of this gloominess is that firms have consistently had their expectations of a pick-up in sales dashed in reality," senior economic Christina Leung said in a statement. "Their optimism is starting to wane - firms now see weak demand ahead."

The QSBO follows ANZ Bank New Zealand's business confidence survey last week showing just 3 percent of firms were optimistic about the economy, with a growing divide between an upbeat North Island and an increasingly gloomy South Island.


Leung told a briefing in Wellington that the survey's pessimism suggested an increased risk the Reserve Bank will cut the official cash rate to 2 percent in April, rather than wait until June.

The New Zealand dollar slipped to 67.99 US cents, from 68.25 cents immediately before the 10am release of the survey.

Today's survey showed of the 845 respondents a net 26 percent experienced an increase in costs while 5 percent cut prices in the quarter and 24 percent anticipate those costs to keep rising, while 11 percent plan to hike their prices.

Leung said this inability to pass on higher costs had weighed on firms profitability and firms were increasingly looking to raise prices to lift earnings.

"Businesses are finding it very difficult to raise prices, however there is some optimism and intention that prices will increase in the next quarter," Leung said.

"Businesses have tended to be fairly optimistic about improvements in profitability, which is why they've had their expectations dashed, and is one development that's worth keeping an eye on."

The survey showed a net 4 percent of businesses experienced a decline in profit in the March quarter, unchanged from the prior period, and 17 percent project increased earnings ahead, up from 4 percent in December.

Firms scaled back their hiring intentions with a net 9 percent looking to hire, down from 14 percent in December, while 11 percent took on more staff, down from 17 percent in the prior period. A net 33 percent said it was hard to find skilled labour, and a net 11 percent said unskilled labour was difficult to attract.

Capacity utilisation was unchanged at 93.2 percent, while a net 15.8 percent saw capacity as a constraint, down from 17.4 percent.

Investment intentions were largely unchanged, with a net 2 percent looking to buy new buildings, up from 1 percent in December, and 11 percent intending to invest in plant and machinery, compared to 10 percent in December.

Manufacturers in particular were gloomy with a net 6 percent expanding output in the quarter, compared to 26 percent in December, and a net 1 percent experiencing a contraction in New Zealand deliveries, down from a net 17 percent expansion.

A net 5 percent of manufacturers experienced a rise in exports, down from 17 percent.