KEY POINTS:
Business confidence has plunged to depths last seen during the first oil shock of 1974.
The latest figures are worse than the Asian crisis or the recession of the early 1990s or the stagflation of the early 1980s.
The New Zealand Institute of Economic Research's quarterly survey of business opinion last month found that 67 per cent of firms expect the general business situation to worsen over the next six months and only 3 per cent expect it to improve.
The net 64 per cent pessimistic is a drop from a net 26 per cent in December.
At the time of the survey both the Bank of New Zealand and Finance Minister Michael Cullen were talking about recession, albeit a short and shallow one, NZIER director Brent Layton said, and there was no sign in the Reserve Bank's March monetary policy statement that an easing was imminent.
"But also I suspect to get this sort of impact firms had to be seeing that the March quarter has not been good to them. Rather than blaming the messengers it would only have had this impact, in my view, if it gelled with what they were experiencing."
Firms' views of their own outlook have also taken a sharp turn for the worse.
A net 8 per cent expect their activity to decrease over the next three months, the lowest level since the 1998 recession. In the December survey a net 11 per cent expected an increase.
Given past correlations between that indicator and gross domestic product it was possible the economy contracted in the March quarter, Layton said.
It would be a close call whether the economy crossed the line this year into recession - defined as two successive quarters of falling GDP.
"But it won't be a good time."
While the survey's growth indicators are all pointing down, the inflation indicators are menacing.
The survey found a sharp rise in the proportion of firms which have increased their own prices in the past three months or which intend to increase them.
Both gauges are at the highest level since March 1987, as is the net balance of firms expecting their costs to rise.
These results would cause the Reserve Bank some angst, Layton said. They suggest inflation, already outside the bank's target band, will get worse before it gets better.
"I think the Reserve Bank will choose to wait and hold. There are no signs here of inflation pressures easing."
A net 56 per cent of firms in the financial services sector expect retail interest rates to be higher over the next 12 months than over the past year.
The Reserve Bank looks to the survey for indicators of how much spare capacity there is in the economy, a key factor in its inflation forecasts.
The latest survey offered no relief.
Manufacturers' and builders' utilisation of their plant and equipment has never been higher since the survey began in 1961.
But they are dialling back their investment intentions as order books deteriorate and profits are squeezed.
Across all sectors profit expectations are the weakest they have been since 1983.
Firms report finding it easier to find labour, both skilled and unskilled. "The measure is still at a level that suggests relatively high difficulty by historical standards, however," the institute said.
As many firms intend to increase staff as intend to shed staff over the next three months.
"This survey confirms our assessment that the economy has hit a pothole you could break your leg in," Westpac chief economist Brendan O'Donovan said.
"We are expecting nothing flash on the growth front in 2008, with a reasonable chance of a technical recession as the housing market slowdown hits spending hard and sharp cost increases pummel profitability."
LITANY OF WOE
* Firms are the most pessimistic they have been about the general outlook since 1974.
* They are the gloomier about their own prospects than they have been since the Asian crisis 10 years ago.
* Inflation gauges have gone from bad to worse.
* Financial sector firms expect interest rates to rise.
