Key Points:

Following the global financial crisis last year local businesses are today reporting a weak domestic economy and expect the situation to continue to decline with job losses likely.

In the New Zealand Institute of Economic Research's quarterly survey of business opinion (QSBO) released this morning, 44 per cent of firms reported a decrease in their activity in the December quarter.

Forty-three per cent said they expected their trading activity to decrease further in the next quarter.

A seasonally adjusted 77 per cent said they expected the general business situation to deteriorate in the next six months. Sixty four per cent, not seasonally adjusted, expected it to get worse.

The number of firms intending to reduce staff over the next three months (32 per cent) was at its highest since June 1991. In the last quarter 7 per cent said they planned to cut staff.

Finding staff was easier across the board, 20 per cent of firms reported finding skilled staff was easier and 43 per cent said finding unskilled labour was easier.

Weak consumer demand was the key to reduced business activity.

The results confirmed there was a "huge scope" for the Reserve Bank to cut interest rates, probably between 50 and 100 basis points.

"But if they went beyond 100 points we wouldn't be too surprised about that," NZIER research economist Ryoko Ito said.

Nine per cent of firms said the incurred increased selling prices in the last three months, with 3 per cent saying they intended to decrease selling prices.

The number of firms (49 per cent) reporting a fall in profitability for the quarter was the highest in 26 years.

Forty six per cent expected profitability to decline in the next three months.

Businesses in every region showed a marked fall in business confidence to levels last seen in the 1970s.

Firms in the lower North Island had the biggest fall with 60 per cent expecting business conditions to deteriorate, from 11 per cent in the September quarter.

UBS NZ senior economist Robin Clements said the survey showed a collapse of business sentiment.

"It is a gross understatement to say that the survey results were worse than expected. Words like terrible, dreadful and disastrous come to mind! We had been anticipating (as the market no doubt was) a deterioration in most aspects of the QSBO but to see many measures at their worst in near 40 years was beyond our comprehension."

Today's survey, said Clements, was "a wake-up call as to the direction of the risks in the near-term...they are all down."

There was a risk that the current quarter would also show economic contraction - which would mean five successive quarters of recession.

He highlighted what might happen if firms embark on a round of "labour-shedding", which could lead to less consumer spending, more pressure of debt servicing, more forced house sales, then further falls in house prices and wealth.

" This would extend, and deepen, the recession into 2009."

Clements and UBS, as a result of today's survey, also expect the Reserves Bank to cut the OCR by 100 basis points later this month.

There was a need for the Government to take some "tangible action to break the downward spiral."

"The Government may have to think outside the square to come up with something that is quick to implement, has an immediate and widespread impact and is reversible (if need be) - one such example is fuel taxes, which make up over 40 per cent of the petrol price, could be enacted virtually over-night, would benefit the cash flow of households and businesses and could be realigned when tax cuts are implemented (if that was deemed necessary)."

ASB Bank economist Nick Tuffley said today's survey result "ranks as the worst in the QSBO's 1970-onwards history as far as the main headlines are concerned."

"General business confidence slumped under the weight of extreme pessimism with net 77 per cent expecting the general business situation to deteriorate."

"These responses reinforce our view that the recession will continue through to the middle of 2009 if not longer, with the risk that the declines in GDP could be even be more severe than we are currently expecting," said Tuffley.

"When expectations of domestic trading activity hit their lowest level over the period from 1970 to date - and do so by a huge margin - that is a strong warning that NZ's recession may have intensified in late 2008/early 2009."

The survey, points out Tuffley, was conducted in December, which gave some time "for perspective to set in" after the October financial market panic.
Almost all the survey responses came in after the Reserve Bank's 1.5 per cent interest rate cut.

"Given the economic disruption increasingly evident in the US and the extent of weakness in the QSBO survey, there is growing risk that NZ remains in recession for much of 2009."

The survey was also influential for the wide array of inflation-related measures, said Tuffley - all of which hammer home that the Reserve Bank has very little to fear from inflation over the next year or two.

Tuffley and the economists at the ASB believe Alan Bollard will cut the Official Cash Rate by 100 basis points - a full one per cent, on January 29.