Business is feeling gloomy.

The New Zealand Institute of Economic Research's (NZIER) quarterly survey of business opinion (QSBO) showed confidence hasn't recovered from the post election slump.

But while the new Government didn't get the bounce back in sentiment it might have hoped for, the news wasn't all grim.

Across the first three months of this year firms were slightly more positive in their outlook for the broader economy - although they were marginally more pessimistic about the outlook for their own activity


Should the Government be worried? Are we headed into another "winter of discontent" - as the slump faced by the Helen Clark government in 2000 was dubbed?

While there is no doubt some lingering dissatisfaction with the election result and policies of the new government, it's also not hard to see other reasons for business concern.

The past three months have seen a steady flow of worrying global news - talk of trade wars, market crashes and a general sense that we must be due for a downturn simply because we have had such a long run of economic growth.

Even more pressing is the profitability problem the firms report.

A key concern raised by business, in this survey and others, is that profit margins are thin. Core costs like rent and transport keep rising but they aren't able to pass those on in pricing.

Retailers in particular are caught in a squeeze between structural deflation pressures (disruptive technology and globalisation) and the return of cyclical inflation as the economy bumps up against speed limits.

So labour shortages are acute and causing stress but firms don't feel like they have room to move on wages. That's dampening hiring expectations.

As Westpac senior economist Anne Boniface noted: "Our macroeconomic forecasts assume that softer business confidence in the first few months of 2018 will translate to a lull in business investment and hiring this year."


"Today's QSBO broadly supports at least the hiring component of this view," she said.

On the upside the survey did record a rebound in investment intentions for plant and machinery.

"With labour costs increasing, firms may be looking to mitigate cost pressures by investing in labour saving technology," said NZIER principal economist Christina Leung.

That's good news in the sense that capital investment drives productivity gains and may offer a way through the impasse on labour - and ultimately wages.

For those worried about interest rates the news from the latest QSBO wasn't all bad either.

As Kiwibank economists noted, the result justifies the Reserve Bank's cautious approach on rate hikes.

"The fact that firms continue to look reluctant to hike prices in the face of rising costs is perhaps indicative of the structural changes that the RBNZ has highlighted as influencing price setting behaviour."