Businesses and the government are warning against an overreaction following a survey showing business confidence has fallen to its lowest level in three years.
The Institute of Economic Research (NZIER) survey says the New Zealand economy is losing momentum, with growth expected below 3 percent in the year ahead.
Lower dairy prices and a softening manufacturing sector have affected confidence. Photo: RNZ / Alexander Robertson
The survey, for the June quarter, says business confidence has fallen to its lowest level since September 2012, and just one in 10 firms expect an improvement in trading during the next three months.
Manufacturing has softened, while activity in the building industry remains solid when compared to the March quarter.
NZIER senior economist Christina Leung. Photo: SUPPLIED / NZIER
The institute says lower dairy prices are biting, with businesses in dairy regions such as Southland and Waikato expecting times to get tougher.
NZIER senior economist Christina Leung expects the Reserve Bank to cut the Official Cash Rate twice more this year from its present level of 3.25 percent.
"We expect the OCR to be at 2.75 percent by the end of this year," said Ms Leung.
"Beyond that, we expect the Reserve Bank will hold interest rates at that level until mid-2017."
Business New Zealand chief executive Phil O'Reilly said it was not surprising business confidence had softened given falling diary prices, the previously high New Zealand dollar and difficulties experienced by major trading partners.
Phil O'Reilly. Photo: BUSINESS NZ
"Issues around geopolitical risk in Europe - they're our largest trading partner for many small and medium businesses - Australia still in the doldrums, China coming off growth.
"But bear in mind you've got also Christchurch still performing very, very strongly for us, you've got three years worth of growth in the manufacturing sector and you've got the kiwi dollar falling over in a big way in the last week or so against most of our major trading partners."
Labour Party leader Andrew Little said most businesses had seen what was coming as a result of falling dairy prices.
"You can't have a massive fall in dairy prices and not think that it's going to affect the regions, which it has, we've seen declining job opportunities in the regions
"I think the fact that there's been no serious attempt to deal with the escalating house prices in Auckland and now the events that are happening both in Europe and in China.
Mr Little says the Government needs to take responsibility for the fall in confidence and support businesses through these headwinds.
But the government sees no need to hit the panic button.
Economic Development Minister Steven Joyce said economic growth of just below 3 percent would be among the fastest rate in the developed world.
"This is a time to actually just continue to do the things that work well," said Mr Joyce.
"We have a clear plan about encouraging investment building skills, encouraging innovation and opening up markets with things like the Korean FTA (free trade agreement).
"The opposition politicians will want to panic but we've seen them want to panic several times over the last six years."