The latest ANZ data on small business sentiment shows confidence is still down but growth prospects are showing early signs of improvement.
New Zealand's largest bank's composite growth measure – which takes into account small firms' views on growth indicators including activity, hiring, profit and lagged investment intentions, and is a proxy for GDP growth - improved in all regions of the country, except for Auckland.
The ANZ Business Micro Scope found regulatory requirements and a lack of skilled staff continued to challenge small businesses.
Small business confidence remained low by historical standards in the June quarter, with 36 per cent of firms pessimistic about business conditions, down from 33 per cent recorded in the previous quarter.
While confidence is laggard, investment intentions improved for the third consecutive quarter despite historically low hiring intentions and profit expectations.
All four growth measures remained at the low end of the spectrum in June, pointing to relatively stagnant growth among small businesses.
Benjamin Kelleher, acting managing director of retail and business banking at ANZ, said small firms were on the verge of looking to invest in the year ahead, and encouragement for local economies and New Zealand more broadly stemmed from improved investment intentions.
"Overall, soft investment is a little worrisome from a medium-term growth perspective, as it implies a lower capital stock than otherwise," Kelleher said.
The measure indicated strong growth prospects in Canterbury, other South Island centres and in Wellington.
Auckland's composite growth measure, however, dropped six percentage points, falling from the top region in the first quarter to the bottom. Canterbury increased by 10 percentage points and other South Island centres increased 6 percentage points.
Small firms' expectations of their own activity fell slightly in the June quarter, down two percentage points.
Activity expectations among agriculture firms bucked the trend, up 16 percentage points, while expectations from retail firms dropped 11 percentage points - to the lowest level since 2009.
"While these results are promising, pessimism continues to dominate small business confidence this quarter. A net 36 per cent of small businesses are pessimistic about general business conditions, which resembles the level of small firm sentiment in the years leading up to the Global Financial Crisis," Kelleher said.
"We don't think the GFC story is likely to unfold again anytime soon, but small firms are likely feeling the impacts of the recent softening in economic momentum, with an increasingly uncertain global outlook also weighing.
"This shows there's still work to be done despite concerns around regulation, falling dairy prices and difficulty finding skilled staff."
Firms' profit expectations remain negative but are recovering, he said.
Manufacturing firms are the most optimistic about earnings among all industries.
Regulation remains the biggest problem facing small firms, and has been since December 2017, followed by difficulty in finding skilled employees.
Increases to the minimum wage has also impacted firms. Pay rates were ranked as the sixth biggest problem facing small businesses and fourth biggest problem for large firms.