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Business sentiment has turned more pessimistic as firms struggle with lower sales and high interest rates, leading them to shed staff and hold back on investment.

The Institute of Economic Research’s June quarter business survey shows a net 35 percent of respondents think economic conditions will get worse in the coming year.

That compares with a net 25 percent in the March survey, and the lowest level since mid-2021.

Firms reported a decline in their own trading and were markedly more negative and cautious about the prospects for their profits and investments.

A net 28 percent of firms reported a fall in their trading in the past quarter from a 24 percent decline in the previous survey.

Firms expected the weakness would continue with a net 10 percent forecasting a drop in their own business in the coming quarter from 12 percent in the previous quarter.

NZIER principal economist Christina Leung said the survey pointed to the economy going backwards.

“These results suggest the potential for a continued slowing in the New Zealand economy over the coming year on the back of higher interest rates and heightened uncertainty.”

She said slowing sales and high interest rates were having a marked impact on sentiment and activity.

“Over 60 percent of firms are now reporting lack of sales as the primary constraint on business, which was a significant increase.”

Leung said the weakness in demand and sales was showing through in easing inflation pressures with firms less able to raise prices, which was what the Reserve Bank was aiming for.

Inflation was expected to be back in the RBNZ’s 1-3 percent target band before the end of the year.

“We have pencilled in the first rate cut in May next year but see there’s a risk that the cuts are earlier.”

The construction sector was the most pessimistic as falling demand forced firms to cut prices and shed workers.

Weakness in demand and profits was evident in the other sectors surveyed, notably retailers.

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