KEY POINTS:
Business confidence has rebounded since Fonterra's announcement of a hefty increase in the forecast dairy payout.
A net 37 per cent of respondents to the National Bank's monthly survey expect business conditions to deteriorate over the coming year, an improvement from the net 48 per cent who were pessimistic a month ago.
It retraces more than a third of the steep fall in last month's survey.
But apart from last month, "headline" confidence has not been weaker than this since early last year.
The bank's chief economist, Cameron Bagrie, said most of responses came in during the first week of the month and so would not have reflected the Reserve Bank's most recent interest rate rise or the continued rise of the dollar to new post-float highs.
Still it was a reminder there were tailwinds, especially from commodity prices, offsetting the headwinds from interest and exchange rates, he said.
Fonterra announced last month a record payout for next season of $5.53 a kg of milk solids
Team New Zealand reaching the America's Cup might also have provided a fillip.
Firms' views of their own prospects have also rebounded. A net 15 per cent expect to increase activity, up from a net 8 per cent last month, but still down from 23 per cent in April.
Hiring and investment intentions ticked up as well, as did expectations for profits and exports.
Collectively the indicators in the survey pointed to economic growth of around 1.5 per cent, Bagrie said.
But there was a disconcerting inflationary undercurrent, he said. A net 31 per cent of respondents expect to raise their prices, up from 29 per cent last month.
The terms of trade - the prices we get for our exports relative to what we pay for our imports - are the best they have been since 1974.
Bagrie said that represented a historic windfall for the economy and a chance to lift the country from the bottom third of the OECD rankings.
But two preconditions had to be met, he said, and at the moment neither looked promising.
"Firstly, inflation pressures need to be contained."
Pricing intentions were on the rise again and inflation expectations in the survey remained at 3.2 per cent - outside the Reserve Bank's target zone.
The other prerequisite was higher productivity. Since 2001 productivity growth had averaged only 1.1 per cent a year compared with 2.5 per cent in the 1990s.
Combined with little spare capacity in the labour force, that suggested the economy's potential or sustainable growth rate was little more than 2 per cent, Bagrie said.
While the decline in productivity growth was partly cyclical, its roots lay deeper, in infrastructure deficits, a growing burden of regulation and compliance costs, uncertainty in key industries such as electricity and a raft of policies that delivered poor economic incentives.
