Business confidence improved somewhat in the December quarter but still remains deeply pessimistic, the latest quarterly survey of business opinion by the New Zealand Institute of Economic Research shows.

However, firms' views of their businesses' prospects in the next three months nudged upwards into positive territory, reflecting improving demand.

A net 18 per cent of businesses still expect business conditions to worsen over the next six months, although that's significantly better than the net 28 per cent expecting worsening conditions in the previous quarter. That had been the worst reading since March 2009.

Now, a net 17 per cent now expect their own business activity will pick up in the next three months, up from 11 per cent three months ago, and a net 4 per cent reported an actual improvement in the December quarter, up from zero last quarter.

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Pessimists and optimists are netted off against each other to produce the overall index figures.

The New Zealand dollar was steady on the news, trading at 68.20 US cents shortly after the survey was released versus 68.18 US cents just prior.

NZIER says the own activity measure tends to be a better indicator of GDP than the headline confidence figure.

Previously, the worsening pessimism had been blamed on government policy and rising labour costs and principal economist Christina Leung says the latest survey suggests a greater certainty about government policy.

But the big driver has been improving demand "making firms more optimistic about expanding," Leung says.

"There was a rebound in hiring in the December quarter while hiring intentions for the next quarter remain positive," she says.

A net 5 per cent of businesses hired more people in the December quarter and a net 13 per cent are expecting to hire more workers this quarter.

But a net 53 per cent say skilled labour has become harder to find, up from 44 per cent last quarter, and 35 per cent report difficulties in hiring unskilled staff, up from 29 per cent.

"Firms are also looking to increase new investment in plant and machinery over the coming year. However, firms are more cautious when it comes to new investment in buildings," Leung says.

"This caution is also reflected in architects' expectations of commercial construction work over the coming year with architects expecting no growth in this pipeline."

A net 4 per cent do not intend to invest in buildings, down from 5 per cent last quarter, but a net 7 per cent said they would be investing in plant and machinery, up from 4 per cent three months ago.

While architects are expecting no new commercial work in the next 12 months, a net 13 per cent are expecting more residential work and a net 26 per cent are expecting increased government work.

Leung says weak profitability remains a concern. The survey shows a net 22 per cent experienced profit declines in the December quarter, down a touch from the 23 per cent reporting actual profit falls three months ago.

A net 15 per cent are expecting deteriorating profits this quarter, the weakest level since March 2011, up from 7 per cent three months ago.

The survey suggests those figures reflect building inflationary pressures with a net 47 reporting rising costs in the December quarter, up from 44 per cent three months ago.

But it looks like firms are finding it difficult to pass on rising costs.

A net 21 per cent are expecting to raise prices this quarter, down from 28 per cent three months ago.

Manufacturers remain the most pessimistic. While both export and domestic demand improved, their profitability remains weak.

Retailers report a pickup in sales but say costs continue to rise and that profitability is weak.

NZIER is forecasting the December quarter GDP figures – not due until late March – will show the economy grew 2.5 per cent in calendar 2018 but this latest survey suggests it grew only about 2.2 per cent.

She says she expects the Reserve Bank will hold its official cash rate through to early 2020 and a net 6 per cent of firms are expecting interest rates to fall over the coming year.

- BusinessDesk