New Zealand firms blamed government policy and rising labour costs for their gloomiest sentiment in nine years, according to the New Zealand Institute of Economic Research.

A seasonally adjusted net 28 per cent of respondents to the quarterly survey of business opinion were pessimistic about the economic outlook, the worst reading in the survey since March 2009, when local markets hit rock-bottom following the global financial crisis. In March, a net 21 per cent of firms were pessimistic.

The New Zealand dollar fell to 66.04 US cents from 66.13 cents immediately before the announcement.

The downbeat tone matched firms' own activity, with a net 0.4 per cent experiencing an increase in the September quarter, down from 7 per cent in the June survey. Just a net 10 per cent anticipate increased demand in the coming three months, down from 12 per cent three months earlier.

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NZIER added an extra question to find the cause of firms' malaise for the first time in the latest survey. More than half said government policy was a major factor, with the big end of town more likely to blame the Beehive compared to smaller businesses. Retailers, manufacturers and builders were more concerned by labour shortages and costs, and declining consumer confidence.

"Businesses that said that the economic situation will improve were more likely to name shortages as a key influence, while businesses that were downbeat about the economy were more likely to name government policy as a key influence on business confidence," NZIER principal economist Christina Leung told a briefing in Wellington.

Declining business confidence has been politicised since the formation of the Labour-led government last year, prompting Prime Minister Jacinda Ardern to label it "a flashing great neon sign with giant lights and fireworks going off behind it". She set up an advisory group headed by Air New Zealand chief Christopher Luxon to have her ear. The survey of 753 firms was taken in the three weeks to Sept. 25, after the announcement of the group.

Leung said the weaker activity indicated the economy would slow to a pace of 2 per cent growth in the second half of the year, following annual GDP growth of 2.8 per cent in the June quarter. Treasury yesterday said the government's Families Package, on-going strong migration and a modest pick-up in housing activity would support economic growth through the rest of the year.

The QSBO showed a net 23 per cent of firms experienced shrinking profit in the September quarter, compared to 16 per cent experiencing shrinking earnings in June. A net 7 per cent anticipate lower profits in the coming quarter, an improvement on 12 per cent in June.

Leung said that deterioration would typically weigh on employment and investment intentions.

A net 3 per cent of respondents reduced headcount, compared to a net 14 per cent who took on new staff in June, although a net 13 per cent expect to take on staff, compared to 6 per cent in June. Firms still struggle to hire, with a net 44 per cent saying it's hard to find skilled labour and a net 29 per cent saying it's hard to find unskilled workers.

Investment intentions remained subdued with a net 5 per cent expecting to scale back investment in buildings, while a net 4 per cent expect to invest in new plant and machinery.

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Manufacturers were the most pessimistic sector, with a net 40 per cent anticipating a deterioration in the economy, which NZIER said coincided with weaker demand and rising costs. The building industry was also downbeat with a net 19 per cent expecting deterioration, and a net 18 per cent experiencing lower profits.

Still, architects expect more housing and commercial work in the coming 12 months, although they don't expect to see any increase in new government work.

- BusinessDesk