KEY POINTS:
A worst-of-both-worlds economy with activity at recessionary levels but inflation pressures climbing is depicted in the Institute of Economic Research's quarterly survey of business opinion.
What firms are reporting and expecting about their activity - historically a close fit with gross domestic product - has taken a dive, institute chief executive Brent Layton said.
"It is not just consistent with the June quarter being negative but suggests firms expect the September quarter will be negative as well, making three quarters at least of contraction."
A net 18 per cent of firms reported a decrease in their activity, up from a net 7 per cent in the March survey and the weakest level since 1998.
Their expectations about the next three months show a similar decline, to the weakest level since 1991.
At this stage the recession looked like being more akin to the 1998 Asian crisis than the early 1990s, Layton said.
The Bank of New Zealand's head of research, Stephen Toplis, said the survey gave the Reserve Bank the green light to start cutting interest rates, though whether it would be at the next opportunity, July 24, or in September remained a moot point.
The survey points to a marked softening in the labour market.
A net 3 per cent of firms reported a decline in staff numbers over the past three months and a net 6 per cent of firms say they intend to shed staff over the next three months.
There has also been a sharp fall in the reported difficulty of finding skilled labour, from a net 36 per cent saying it was getting harder in the previous survey to a net 19 per cent now, the weakest level for nine years.
A net 6 per cent of firms say it has become easier to find unskilled labour, also an eight-year low.
But while the Reserve Bank might take some comfort from the labour market results, other indicators of inflation will do little to reassure it.
A net 47 per cent of firms raised their prices in the past three months, the highest for 21 years.
Even more - a net 71 per cent - expect their costs to rise, the highest level since 1986.
Consequently a net 40 per cent expect a further decline in their profitability over the next three months, the most since 1982.
The survey is closely studied by the Reserve Bank as its longevity and detail make it a good barometer for a number of economic parameters.
But despite the weakness of the latest readings, Layton said the best course for the bank was to do nothing.
"Yes the economy is slowing but with those cost expectations and pricing intentions there's a real risk of letting the genie of inflation expectations out of the bag. Once that happens it will take a long time to get it back in," he said.
Toplis said he believed the trough of the downturn was fast approaching.
As the year wore on, the weakening dollar would provide a fillip to exporters, to add to the boost from the dairy payout and tax cuts from October 1. That all augured well for a positive December quarter.
"But if there is to be any confidence this upward momentum can be sustained, we will need to see, very soon, a substantial bounce in both consumer and business confidence," Toplis said.
On the strength of the survey - or rather its weakness - Deutsche Bank chief economist Darren Gibbs now sees a better than 50:50 chance the Reserve Bank will start its easing cycle on July 24, unless next week's inflation data are even worse than expected.
ANZ National Bank economist Philip Borkin said the survey suggested the economy was slowing more rapidly than the Reserve Bank forecast last month, but with higher near-term inflation.
DARK DAYS
* Firms are as gloomy as they have been since 1974 when it comes to the business environment.
* On their own prospects - a more reliable indicator - sentiment has dived to levels suggesting three straight quarters of economic contraction.
* Pricing intentions and cost pressures point to an ugly outlook for inflation and profits.
