The market had eagerly awaited the New Zealand Institute of Economic Research's (NZIER) Quarterly Survey of Business Opinion as the survey is widely regarded as an accurate reflection of the country's economy at the time it is taken.
The survey points to a sharp slowdown in growth over the second half of this year.
The institute said the survey also showed economic activity slowed in the September quarter. Businesses remained gloomy and the trading activity indicator for the September quarter dropped to -7% from 0%, seasonally adjusted.
Principal economist Shamubeel Eaqub said suggested annual gross domestic product (GDP) growth would slow from a "solid" 2.6% in the June 2012 quarter towards 1.5% in the second half of the year.
"The recovery remains disappointing. Auckland is growing but the post-quake surge in Canterbury is moderating and activity elsewhere is slowing."
The labour market was also softening.
Canterbury hiring had been surging for the rebuild, but stalled in the last quarter. Hiring elsewhere had edged lower over the past six months, he said.
The survey showed inflation was well-contained.
Mr Eaqub said capacity pressures were elevated in Canterbury, mainly in the building sector.
"But there is excess capacity elsewhere. Price increases are modest and the outlook for inflation is muted," he said.
Firms were struggling to raise prices in a slow recovery, and margins and profitsremained under pressure, he said.
"Investment intentions, while positive, are low compared to what we normally see in a recovery phase," he said.
The survey, which started in 1961, covers about 2500 firms. It is New Zealand's longest-running business opinion survey.
Otago Chamber of Commerce president Peter McIntyre said surveys were subjective.
"If you pick up a survey or get called about one, and you are having a bad day, chances are you will be gloomy about it. We are all being overwhelmed by bad news coming out of the United States and Europe. The danger is that we make this our self-fulfilling prophecy."
Businesses in the South did have the ability to expand but remained cautious. But at some stage, a "wave of optimism" would follow the negative feelings, he said.
The strong agricultural returns had boosted regional centres and the Canterbury rebuilding had the chance to benefit other cities, such as Dunedin, Mr McIntyre said.
The BNZ October confidence survey had the lowest number of responses for more than 13 months - 241 replies, compared with 302 in September and 391 in October last year.
The survey found a small lift in optimism about where the economy would be in a year's time for the fourth month in a row. A net 20% of respondents expected the economy to be better 12 months from now, compared with 17% in September and a low of a net 5% expecting deterioration in the early June survey.
BNZ chief economist Tony Alexander said it was clear the recent upward movement in sentiment could not be classified as an event out of the ordinary for the past few years.
"We do not interpret it as a signal the economy is about to embark on an employment and investment-driven surge," he said.
The ANZ Business Micro Scope survey showed small business confidence and hiring intentions were holding up, despite ongoing uncertainty over the economic recovery and jobs.
Small firms' hiring intentions increased slightly in the three months ending September, driven by "micro" businesses with up to five staff.
Firms in the manufacturing, construction and services sectors were leading the way with the most optimistic outlook.
While business sentiment remained relatively stable, the survey suggested small businesses were finding the going harder than their larger counterparts. Small firms cited increasing costs, economic uncertainty and a lack of skilled staff as significant issues.
The results
BNZ confidence survey: A small lift in optimism about where the economy will be in a year's time, for the fourth month in a row.
ANZ Business Micro Scope: Small business confidence and hiring intentions are holding up, despite ongoing uncertainty over the economic recovery and jobs. The manufacturing sector is the most optimistic small business sub-sector.
NZIER Quarterly Survey of Business Opinion: Economic activity slowed in the three months ended September.
Businesses remain gloomy. The recovery remains disappointing.
