The Government is holding its nerve as business confidence continues to fall, rejecting a correlation between sentiment surveys and GDP growth.
Reacting to news that the today's NZIER business opinion survey showed a further decline in confidence, Finance Minister Grant Robertson said the economy remained in good shape.
"Business sentiment is often negative when there is a Labour led government. We've just got to keep on a path that will grow the economy in a sustainable way," he said. "We're going to continue to work with the business community."
There was plenty of good news out there, he said, citing employee and consumer confidence.
Robertson said he didn't see a strong correlation between business confidence and GDP growth.
He noted the last Labour Government had managed average growth of around three per cent despite negative confidence survey results.
Today's NZIER survey found a net 19 per cent of businesses expected deterioration in economic conditions – more pessimistic than the 10 per cent in the previous quarter.
They were concerned about rising costs - including wages - and reduced profitability due to an inability to pass those costs on.
Continuing the recent trend, firms' views on their own trading activity – remained more positive.
But firms' expectations of their own future demand also eased, with fewer businesses expecting improved demand over the next quarter.
These developments did point to softer economic growth in the second half of 2018, NZIER principal economist Christina Leung said.
NZIER found the drop in confidence was strong across the regions, with Taranaki, Otago and Blenheim particularly downbeat.
Weak profitability was a feature across most sectors.
This was a real concern, Leung said.
"Particularly given firms no longer expect a recovery in profitability in the next quarter."
Building sector firms report intense cost pressures in the sector, which is continuing to have a negative impact on profitability.
Building sector firms are no longer optimistic about a rebound in profitability, with a 14 per cent expecting profitability to worsen in the next quarter.
The retail sector was particularly downbeat, with business confidence falling to its lowest level since March 2009.
Profitability in the sector fell sharply, as retailers struggle to pass on substantial cost increases fully through raising prices.
The lift in the minimum wage is likely to have played a key part in the sharp increase in costs, given the relatively greater proportion of the retail workforce that is low-waged, Leung noted.
Weak business confidence and deteriorating profitability was making businesses more cautious about planning for the future, she said.
Although hiring was holding up across most sectors, investment intentions had declined.
This was particularly the case for investment in new buildings, with a net 4 per cent intending to reduce this type of investment.
Some economists have highlighted the risk that this could create a sell fulfilling prophecy if it further dampens growth.
Business groups, like the Employers and Manufacturers Association, have argued that uncertainty about Government policies - such as proposed employment law changes - are behind the falling confidence levels.
Last week the ANZ Business Outlook survey showed New Zealand business confidence had plunged to a seven-month low in June with retail most gloomy as costs, credit and capacity weigh on firms.
Broadly, most economist expect to see GDP growth rebound later this year or early next year as Government spending picks up and stimulates the economy.
For now at least, business seems unconvinced.