New Zealand businesses remained pessimistic about the country's economic fortunes in the March quarter as negative sentiment following the change in government continued into the new year and as profitability remains weak.

A seasonally adjusted net 9 per cent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect economic conditions to deteriorate over the coming months compared with a seasonally adjusted 11 per cent that had expected a deterioration in the prior quarter.

"Business confidence had fallen sharply in the December 2017 quarter in the wake of the new Labour-led government taking office, and this pessimism has carried over into the first quarter of 2018," said NZIER principal economist Christina Leung.

The headline confidence reading, however, is more pessimistic than firms' own trading with a net 15 per cent experiencing increased activity in the March quarter versus 10 per cent in the prior quarter and a net 16 per cent anticipating more demand in the next quarter versus 17 per cent in the December quarter.


"It's more about sentiment than actual activity," said Leung.

Retailers are still the most pessimistic of the sectors, despite an increase in new orders and domestic sales. Changes in employment laws announced by the new government, including an increase in minimum wage, are likely to have contributed, said Leung.

"Changes in the labour law are of key concern, particularly amongst the smaller businesses," she said.

The QSBO showed profitability remained weak in the March quarter with a net 7 per cent reporting lower earnings, unchanged from the December quarter and expectations are for profitability to remain the same in the next quarter.

Regarding the headline confidence number, Leung noted the "continued weak profitability appears to be a key contributor to this pessimism, and businesses are not optimistic this will improve."

The QSBO showed a net 1 per cent of firms indicating plans to reduce investment in buildings versus 2 per cent that indicated they were planning to increase it in the December quarter. A net 17 per cent have plans to invest plant and machinery versus 10 per cent in the prior quarter.

According to Leung, with labour costs increasing, firms may be looking to mitigate cost pressures by investing in labour-saving technology.

Firms are still finding it difficult to hire new staff, with a net 44 per cent saying skilled labour was hard to find, versus 49 per cent in December. A net 29 per cent found it hard to attract unskilled labour, compared to a net 31 per cent in the prior period.


Companies still expect to face cost pressures, with a net 35 per cent anticipating increased costs compared to 38 per cent in December while experienced costs were largely unchanged with a net 31 per cent reporting higher costs compared to 29 per cent in the prior period.

Pricing intentions lowered, with 21 per cent expecting to lift prices in the coming quarter versus 31 per cent in March, while a net 16 per cent raised prices in March versus 18 per cent in the prior period.