The prospect of New Zealand's economy hitting a double-dip recession by the end of the year loomed large yesterday.
The influential NZIER Quarterly Survey of Business Opinion showed the economy contracted in the September quarter after stalling in June.
If the economy contracts again in the three months ended December, the economy would be officially in a recession.
In New Zealand, a recession is measured by two consecutive quarters of negative GDP.
The best-case scenario still has the economy stalling in December, recording year-on-year economic growth of less than 1%.
The Reserve Bank was expected to remain cautious about the pace of the country's economic recovery and not increase the official cash rate until the March 2011 meeting, ASB economist Christine Leung said.
Weak profitability fuelled pessimism among firms.
"It appears firms are finding it difficult to pass on rising costs, with a smaller proportion of businesses indicating they intend to raise prices, despite the increasing proportion of businesses facing higher costs."
The intention of businesses to hire and invest in plant and machinery were holding up, despite weak profitability, she said.
That was encouraging, as it indicated businesses still generally felt confident enough about the recovery in demand to invest in an expansion of operations.
While the decline in headline business confidence was broad-based, the pessimism was particularly acute in the building and retail sectors, Ms Leung said.
"We expect reconstruction activity following the Canterbury earthquake will boost the building sector."
The survey results suggested inflation pressures were muted as businesses found it difficult to pass on rising costs, she said.
That had hampered profitability and was the key driver in business confidence.
NZIER principal economist Shamubeel Eaqub said there was a synchronised slowdown of business activity across regions and sectors with construction and financial services slowing the most sharply.
Large firms, which had been recovering strongly, fell sharply, and small firms remained in the doldrums.
"Business profitability is deteriorating again; highly unusual for this stage of the recovery.
This may weigh on future hiring and investment - although hiring and investment intentions remain encouragingly resilient."
The recovery continued to disappoint optimistic expectations, he said.
Labour finance spokesman David Cunliffe said the economic recovery had stalled and no new external event had brought it about.
"It shows a failure by the National Government to lead New Zealand out of a recession while Australia and China continue to grow."
The NZIER survey followed a Berl report that warned of risks of a double-dip recession and recent warnings from the International Monetary Fund that governments should not back off stimulus packages before 2011.
"Because there is no plan for growth, New Zealand's economic woes have deepened. Lack of confidence is feeding on itself," Mr Cunliffe said.
All around New Zealand, regions were going backward and unemployment was stubbornly high - 160,000 New Zealanders were paying the price.
"John Key and Bill English are fiddling while the 'recovery' burns," he said.
