The Canterbury earthquake, slow economic recovery and high oil prices have knocked business confidence.
The New Zealand Institute of Economic Research (NZIER) quarterly survey of business opinion shows a net 11% of firms expect general business conditions to deteriorate in the next six months. That compares with a net 1% in the previous quarter.
The quarterly survey of business opinion found a net 5% of firms experienced a decline in trading during the three months to March, worsening from from the net 1% reporting a decline in the December quarter.
Once Canterbury firms were excluded, a net 2% reported a decline - a turnaround from a net 4% experiencing a trading pick-up in the December quarter.
NZIER principal economist Shamubeel Eaqub says domestic trading activity, which mirrors economic growth, slowed modestly throughout New Zealand, but contracted sharply in earthquake-hit Canterbury.
He says firms have little ability to raise prices, because demand remains subdued - and that is eroding profitability.
Mr Eaqub says a lack of sales has been the biggest constraint on businesses in the past three years and it is hard to know when demand will improve.
More firms report falling profits, and Mr Eaqub says that could mean fewer jobs and investment for the first half of this year.
However, he told Checkpoint on Tuesday that cautious spending as household and businesses take on less debt is not necessarily a bad thing.
"We're seeing far less reliance on debt, far less reliance on housing and a far lower reliance on increasing house prices. We're talking about real increases in income, real increases in spending and real increases in investment.
"The only thing is, over the last three years there just hasn't been much of it and until we see confidence returning, until we see households becoming a bit more forthcoming with some of their money, we won't see a strong recovery."
