The survey results were the weakest in nearly 40 years and although foreshadowed by the monthly National Bank survey, the NZIER survey has a longer pedigree.
The survey started in 1968 and the December quarter results were the weakest since 1970.
ASB Bank chief economist Nick Tuffley said when expectations of domestic trading activity hit their lowest level since 1970, and did so by a huge margin, this was a strong warning that New Zealand's recession might have intensified late last year or early this year.
The survey was conducted in December, giving some time for perspective to set in after the financial market panic in October.
Ninety-seven percent of responses arrived after the Reserve Bank's 1.5% cut in the official cash rate to 5%.
NZIER research economist Johannah Branson said the weak domestic economy provided scope for the Reserve Bank to further reduce its OCR this month.
The survey results pointed to a continued contraction in domestic trading activity along with easing pricing intentions, in the final quarter of last year.
Indicators of domestic trading activity suggested that real GDP declined again in December, implying negative economic growth for all of last year.
On a seasonally adjusted basis, a net 44% of firms reported a drop in their own activity in December, which was the worst result of that indicator since at least 1970.
A net 43% of firms reported they expected a drop in their own activity in the March 2009 quarter, again the worst result since at least 1970.
"Given the considerable uncertainty facing New Zealand businesses in the current economic environment, some volatility in this indicator is to be expected.
"That said, the sheer scale and sharpness of the deterioration is difficult to ignore," Ms Branson said.
Marked falls in employment and investment intentions, in particular, suggested that economic growth might be softer for longer than previously expected.
As well as the fall in domestic trading activity, the latest survey indicated easing in the difficulty of finding labour, capacity utilisation, cost pressures and pricing intentions, she said.
That highlighted that the slow down in the domestic economy had dampened inflationary pressures, providing scope for the Reserve Bank to make a further cut in the OCR, Ms Branson said.
A study of the survey showed that the building sector remained under acute pressure.
A net 23% of building construction firms reported a decrease in output over the December quarter while a net 65% of building material suppliers reported a decrease in output.
Architect's views about work availability in the 12 months ahead provide a good lead indicator for building construction and in this part, the survey was very weak.
A net 59% expected to see housing-related work decline compared with 31% in September.
A net 64% expected commercial and flats-related work to decrease compared to just 20% in September.
The survey suggested the employment situation is deteriorating faster than firms had previously expected.
A net 21% have cut staff numbers in the past quarter while a net 32% expect to cut numbers in the next three months.
A net 43% are reporting it is easier to find unskilled labour while a net 20% are reporting it easier to find skilled labour.
The latest figures show how quickly and sharply the labour market has turned.
New Zealand has gone from a situation of extreme labour shortages into a rapidly-developing situation of a large amount of slack in the system.
Mr Tuffley said that given the economic disruption increasingly evident in the US, and the extent of the weakness in the December survey, there was a growing risk that New Zealand would remain in recession for much of this year.
Inflation had been well and truly flushed out of the system, he said.
