ANZ's monthly business confidence survey showed that headline business confidence fell another five points to a net 50.3 per cent of businesses expecting conditions to deteriorate in the year ahead.
While firms' views of their own activity were steady, with a net 3.8 per cent expecting an improvement, a net 5 per cent of firms are expecting to reduce investment during the next 12 months, down 6 points.
"If this weakness is sustained, it will not bode well for GDP growth heading into the end of the year," said ANZ Bank chief economist Sharon Zollner.
Markets moved to price in a 40 per cent chance of a rate cut by mid-2019, from 30 per cent before the report. New Zealand's two-year swap rate fell 7 basis points to 1.96 per cent and 10-year swaps eased 5 basis points to 2.82.
Investors are mindful of the Reserve Bank saying that further weak growth could trigger a rate cut "and weak business confidence could be a warning of that weaker growth," said Imre Speizer, head of NZ strategy at Westpac Banking Corp.
The central bank kept the official cash rate at a record low 1.75 per cent earlier this month. Governor Adrian Orr said then that he expects to keep it unchanged at least a year longer than previously forecast and could even opt to cut rates as he seeks to jump-start economic growth.
"For those believing the economy is stumbling and the Reserve Bank is getting closer to easing, today's ANZ Survey would have come as strongly supportive evidence," said BNZ head of research Stephen Toplis.
The survey comes in a week when Prime Minister Jacinda Ardern said the weak business confidence had become "a flashing great neon sign with giant lights and fireworks going off behind it".
On Tuesday she announced a new business working group headed by Air New Zealand chief executive Christopher Luxon.
Speizer says the next three weeks will be key as partial data that feeds into the gross domestic product starts rolling out, including terms of trade, construction activity and manufacturing output. The second-quarter GDP data is due September 20.
"We had a strong retail sales input already. So it is shaping up like it could be quite a strong GDP report which would really catch the market out as it's been stuck in this doom and gloom mode."
The kiwi traded at 91.35 Australian cents from 91.32 cents yesterday and traded at 4.5448 Chinese yuan from 4.5693 yuan yesterday. The kiwi dropped to 51.06 British pence from 52.10 pence and traded at 56.87 euro cents from 57.36 cents yesterday. It fell to 74.29 yen from 74.62 yen yesterday.
