Confidence among businesses appeared to improve in the three months ended December, both in the businesses' own trading conditions and in the general state of the economy.

The New Zealand Institute of Economic Research's (NZIER) quarterly survey of business also showed the economy rebounded in the December quarter after contracting in September.

Trading activity for firms improved from -15% to -1% on a seasonally adjusted basis.

NZIER principal economist Shamubeel Eaqub said the rebound was patchy, and was concentrated in large firms and the upper North Island.

Activity fell sharply in Canterbury, reflecting the post-earthquake disruption.

Despite that, most sectors experienced better conditions in December.

There was a large rebound in retail sales.

But as most of the survey responses were received in the first half of December, they would not reflect the lacklustre retail environment closer to Christmas, he said.

"The economy rebounded from a weak September quarter, avoiding a double-dip recession. The recovery remains shallow and slow compared to previous cycles."

A return to growth had brightened the mood of business, Mr Eaqub said.

Seasonally adjusted business confidence rose from -8% to 3% and the confidence was slowly filtering through to new hiring and investment.

However, that needed to accelerate to drive a sustainable recovery.

Continued deleveraging by households, restrained government spending and a soft housing market would influence the medium-term outlook, he said.

ASB economist Christine Leung said it was encouraging that the improvement in activity was broad-based.

In particular, manufacturing reported a rebound in activity on the back of improvement in both domestic and export sales.

"This is positive for the economic recovery, given manufacturing is a key sector of the New Zealand economy, and activity in this sector was one key area of downside surprise in the recent third-quarter GDP report."

With historically low inventory levels, Ms Leung expected a modest improvement in manufacturing output in coming quarters. Some businesses were still intending to expand their workforce.

As a result, businesses were finding it increasingly difficult to find skilled labour.

That was expected to flow through to emerging wage pressures, albeit from a subdued level, in the coming year.

Businesses reported easing cost pressures and fewer businesses intended to raise prices.

Those measures suggested inflation pressures were contained for now, Ms Leung said.

With pricing intentions falling more than costs expectations, it appeared the margins of businesses were still squeezed.

The Reserve Bank would be encouraged by the survey results, as they indicated a broad-based improvement across sectors, she said.

In addition, with inflation pressures looking contained, there was little urgency to raise the official cash rate.

The central bank indicated in December it wanted to be more confident the recovery was "firmly under way" and inflation pressures were lifting before it started to normalise monetary policy.

ASB expected the June meeting would be the earliest "live" meeting for the bank to contemplate resuming the reduction of monetary policy stimulus, Ms Leung said.

(Source Dene MacKenzie, Otago Daily Times)