Business confidence declined in the December quarter as businesses faced the prospect of weaker growth following last October's change of government, NZIER said.

NZIER, in its quarterly survey of business opinion (QSBO), said firms turned pessimistic about the country's economic fortunes in the quarter for the first time in more than two years.

A seasonally adjusted net 11 per cent of firms surveyed expected economic conditions to deteriorate in the first half of this year, turning negative for the first time since September 2015, and falling from a positive reading of 5 per cent in the prior period.

The headline confidence reading is more pessimistic than firms' own trading with a net 10 per cent experiencing increased activity in the December quarter and a net 18 per cent anticipating more demand in the first three months of 2018.


The decline in trading activity indicated slower economic growth although NZIER principal economist Christina Leung said it was more a moderation and she expects annual expansion of 3 per cent.

"Business confidence had fallen in the previous quarter ahead of the general election, and it appears uncertainty over the [new Government's] policies have made businesses even more downbeat," Leung said in a statement.

"Business may be worried about the outlook for the New Zealand economy under the new Labour-led Government, but for now that is not reflected in demand in their own business," she said.

Westpac senior economist Michael Gordon said business confidence typically declines when there is a change to a Labour-led government.

"But I don't think that that is the whole story because we have seen confidence fall even before the election," he said.

Confidence levels started to wobble last year when evidence emerged that the housing market - which has links to household spending intentions - was cooling.

"There does seem to be a genuine slowdown in growth compared to what we have see in the past couple of years," he said.

Gordon added concerns in previous surveys about inflation being persistently low seem to have passed.

The NZIER survey is a key measure of business indicator that is watched by the Reserve Bank and typically tracks closely with the ANZ Business Outlook, which was at an eight-year low last month.

Firms have become gloomier since the formation of the Labour-led Government, with questions hanging over what impact its policies will have on industrial relations and how effective it will be reconfiguring the property market.

Leung said previous surveys showed business confidence tends to drop when Labour takes office and increase when National is in charge, but that sentiment has a muted impact on actual trading activity.

The QSBO showed profitability continued to weaken in the December quarter, with a net 7 per cent reporting lower earnings and a net 6 per cent anticipating reduced profits in the coming quarter. That compares to a net 6 per cent experiencing lower profits but a net 13 per cent expecting increased earnings in the September survey.

ASB Bank expects to see a slight slowdown in economic growth due to the near-term economic uncertainty and disruption to business planning as the incoming Government's new policies are bedded in.

"Nonetheless, we expect confidence to recover over the coming months and for economic momentum to recover over 2018," ASB said in a commentary.

Economists at ANZ said firms were still reporting reasonable levels of activity to end the year.

"But a little more caution is creeping in as firms deal with a more uncertain policy environment, capacity pressures and an intense margin squeeze," the bank said in a commentary.

"We are left with the impression of an economy which, while not performing poorly by any stretch, is set to face a few more headwinds over the first half of 2018.

"Overall, we are left with the impression of an economy growing at a steady, albeit unspectacular, pace," ANZ said.

- additional reporting: BusinessDesk