The New Zealand Institute of Economic Research's latest quarterly survey of business opinion could be summarised as ''less gloomy'' rather than ''more happy'', principal economist Christina Leung said.
Confidence rebounded from a nine-year low in the December quarter but remained at historically low levels.
A net 18% of businesses expected general economic conditions to worsen over the coming months which was a decline from the net 28% of businesses who had expected a worsening in the previous quarter.
ANZ senior economist Liz Kendall said businesses remained downbeat, reflecting the headwinds the economy was facing and the cycle was now ''looking tired''.
Firms were facing high labour costs, margin pressure and credit constraints, while uncertainty about about future demand was weighing amid lingering angst about political changes and the global outlook, she said.
The bank believed the Reserve Bank would eventually need to cut the OCR to give the economy a boost.
Views appeared to be shifting that way and a net 6% of firms now expected an OCR cut over the next 12 months compared with net 21% expecting interest rates to increase last quarter, she said.
More positively, Ms Leung said businesses reported a lift in demand in the December quarter and firms' own trading activity was a better indicator of GDP growth than business confidence, Ms Leung said.
Improving demand was making firms more optimistic about expanding. There was a rebound in hiring in the December quarter and hiring intentions for the next quarter remained positive.
Firms were also looking to increase new investment in plant and machinery over the coming year but were more cautious when it came to new investment in buildings.
Although confidence in the manufacturing sector picked up in the December quarter, it remained the most downbeat.
Despite a rebound in domestic and export sales, weak profitability continued to weigh on sentiment in the sector.
Westpac senior economist Anne Boniface said a striking feature of recent confidence surveys had been increased pressure on firms' bottom lines as rising costs and limited pricing power ate into profitability.
In the December quarter, a net 48% of firms reported rising costs (up from 43% last quarter), while the proportion of firms reporting that they raised prices fell slightly over the same period, from 23% to 20%.
Retailers, in particular, had been squeezed by increasing costs and had little opportunity to pass those costs on to consumers, given intense competition from the likes of online retailers, she said.
Otago Southland Employers' Association chief executive Virginia Nicholls said businesses in the region were busy and more positive than the survey was suggesting.
''They are reporting good demand, which is making firms more optimistic about expanding and hiring more staff.''
It was apparent that costs were a big issue. A lot of firms were finding it hard to pass costs on to customers and were finding profitability a challenge, Ms Nicholls said.
Otago Chamber of Commerce chief executive Dougal McGowan said it was good to see more optimism around the growth of businesses.
He agreed the biggest issue facing businesses was around profitability. If that was down, then they had to look at their structure and what that might mean in the future.
