Economic and employment conditions were stable outside Canterbury, but there were some warning signs, NZIER principal economist Shamubeel Eaqub said yesterday.
Releasing the New Zealand Institute of Economic Research's quarterly survey of business opinion, Mr Eaqub said profitability was being eroded by rising costs, while prices were restrained by weak demand.
"This is limiting new investment and the recovery. Rising overdue debtors, increasing inventories and barely any recovery for small firms suggest the economy is still fragile," he said.
Trading activity continued to contract in earthquake-affected Canterbury, by 28%, while the rest of New Zealand slowed a modest 2%.
The weakness in Canterbury activity was understated as 40% of the potentially worst-hit firms were unable to respond to the survey, he said.
"We estimate domestic trading activity in Canterbury may be minus 55%. Service and retail sector firms were most affected. The same industries expect the June quarter to be very difficult," Mr Eaqub said.
ASB economist Christina Leung said the quarterly survey showed business confidence falling in the three months ended March, with the results broadly in line with the sharp decline in March business confidence in the monthly National Bank survey released last week.
Businesses had become more pessimistic and were more cautious in regard to hiring.
The effects were particularly evident in hiring intentions, she said.
There was a clear divergence between Canterbury and the rest of New Zealand in terms of the intention of businesses to invest in buildings.
"The rebuilding of commercial buildings in Canterbury in the wake of the earthquake is likely to soak up capacity in the construction sector and discourage businesses in other regions to invest in new buildings."
The activity outlook for architects could also be a useful gauge of construction activity in the future, Ms Leung said.
During the March quarter, there was a decline in the one-year-ahead outlook in contrast to the rebound in the two-year-ahead outlook.
That suggested architects expected rebuilding activity to be delayed as a result of the February earthquake and to largely occur next year.
"This is in line with our expectations of rebuilding activity underpinning a recovery in activity over 2012."
Pricing intentions had declined despite an increase in the cost expectations of businesses, Ms Leung said.
The rise in petrol prices in recent months was likely to have increased costs for many businesses.
However, there had been a fall in the net number of businesses intending to raise prices.
That suggested many businesses had found it difficult to pass on those rising costs, probably due to demand remaining subdued.
The continued rise in petrol prices raised the potential for spillover to generalised inflation later this year, she said.
In cutting the official cash rate by 0.5% in March, the Reserve Bank had pre-empted the fall in confidence that would ensue following the earthquake.
"As such, we do not expect any further monetary policy stimulus. We expect the Reserve Bank to raise the OCR from current emergency low settings of 2.5% in March next year, as rebuilding activity underpins a recovery in activity," Ms Leung said.
