Business confidence was down across the board in March but the retail sector was most downbeat, the latest NZIER Quarterly Survey of Business Opinion has found.
A net 33 per cent of businesses surveyed expect a weakening in general economic conditions over the coming months on a seasonally adjusted basis, while a net 9 per cent of businesses reported weaker activity in their own business in the March quarter.
A combination of Omicron, rising costs and uncertainty around the war in Ukraine appeared to have weighed on survey respondents in March, said NZIER principle economist Christina Leung.
The retail sector was now the most downbeat of the sectors surveyed, with a net 60 per cent of retailers surveyed expecting a deterioration in general economic conditions over the coming months.
The pessimism likely reflected the relatively greater impact the spread of Omicron has had on the retail sector, as people stay home out of fear of infection, Leung said.
The retail sector also bore the brunt of worker shortages that arose from the Omicron spread, given the limited ability of its workforce to work from home.
The services sector was also very downbeat.
Overall, labour shortages remained very acute, Leung said.
"We continue to see more firms reporting labour shortage as a primary concern."
This was particularly acute with regard to the availability of unskilled workers, which probably reflected the fact that workers in those jobs were less able to work from home during the Omicron peak, Leung said.
More firms were now reporting sales as an area of concern, while fewer were reporting capacity constraints as a primary issue.
"This does suggest some softening of demand," Leung said.
"In this environment of heightened uncertainty we are seeing businesses planning to reduce investment over the coming year, but when it comes to hiring business is still feeling fairly positive."
The construction sector, which has been one of the strongest parts of the economy through the pandemic, was now showing some signs of cooling, particularly with regard to commercial and government building projects.
"Although construction activity is solid, the architects' measure of work in their own office points to a softening in the pipeline of commercial and government construction work," Leung said.
The survey provided another confirmation of the underlying data signal we've been seeing in recent months, said ANZ economist Finn Robinson.
"Economic activity is struggling against surging costs, shortages and other Covid disruptions. Simultaneously, inflation pressures (and expectations) continue to accelerate.
The NZIER survey ran from March 11 to 24 and asked around 4300 firms whether business conditions will deteriorate, stay the same or improve.