WELLINGTON (Reuters) - New Zealand's business confidence slumped to its lowest in seven years in the second quarter as rising labour costs squeezed corporate bottom lines, a survey showed, reinforcing market views the economy may be in for a soft patch.
The results underscored the pessimism from the business community towards the Labour-led coalition government even as Prime Minister Jacinda Ardern coasts on a wave of popularity both at home and abroad since taking the helm in October.
The outcome, which adds to a recent slew of weak economic data and risks such as escalating global trade frictions, could also put pressure on the central bank to maintain interest rates at record low levels for longer than initially expected.
A net 20 percent of firms surveyed expected business conditions to deteriorate compared with 11 percent in the first three months of this year, a quarterly survey by the New Zealand Institute of Economic Research (NZIER) showed on Tuesday.
Firms' expectations about consumption also weakened with fewer businesses expecting improved demand over the next quarter, pointing to softer economic growth in the second half of 2018, the survey showed.
Some policies by the centre-left government such as raising the minimum wage were seen taking a toll on corporate profits.
Construction and retail firms were particularly hard hit with business confidence in the retail sector dropping to its lowest in nine years, according to the survey.
"Profitability in the sector fell sharply, as retailers struggle to pass on substantial cost increases fully through raising prices," the NZIER said.
"The lift in the minimum wage is likely to have played a key part in the sharp increase in costs, given the relatively greater proportion of the retail workforce that is low-waged."
The survey's measure of capacity utilisation was 92.8 percent, compared with the previous quarter's 93.5 percent.
The New Zealand dollar <NZD=D4> slipped slightly from $0.6712 to $0.6706 following the survey.
GROWTH HURDLE
The data suggests growth may not pick up much for the rest of the year, after having slowed to 0.5 percent in the January-March quarter.
"The pullback in business confidence and own trading activity is a red flag for economic growth," analysts at Kiwibank said, warning that growth could fall below potential over the coming quarters.
"A key risk with weak business confidence is that is becomes somewhat of a self-fulfilling prophecy" with the downbeat mood affecting firms' decisions on investment and hiring, they said.
Raising the minimum wage was among policies pledged by Labour's centre-left coalition, which gained office in October with plans to pour money into social services and housing.
Consumer confidence remains firm and the personal popularity of Ardern, who became the first woman in the country's history to give birth while in office in June, has risen since the election.
In contrast, business confidence has fallen sharply after the hotly contested September vote that ended a decade of centre-right National party rule.
"This cost pressure complicates the inflation and interest rate outlook somewhat for the RBNZ," said ASB Bank senior economist Jane Turner, as the Reserve Bank of New Zealand (RBNZ) wrestles with stubbornly low inflation despite intensifying labour shortages.
"A cost-push led increase in prices may lift inflation in the near term, but in the medium term may see inflation fall back below target if economic demand is not strong enough to tolerate higher prices."
The RBNZ kept rates steady last week and warned of rising risks to the outlook, signalling its resolve to keep record-low rates for some time.
(Editing by Tom Brown and Jacqueline Wong)
