The National Bank's Business Outlook survey found business confidence fell broadly in July, extending the weakness in confidence to the third consecutive month.
Confidence about general business conditions fell to a net 28% expecting improvement over the next 12 months, down 12 percentage points from 40% in June.
(Updated with comments from JP Morgan economist Helen Kevans that the RBNZ is likely to keep hiking the OCR)
Confidence about firms' own business conditions fell 7 percentage points to a net 33% expecting a better situation in 12 months time.
"The movements in this month’s survey are beyond what could be put down to usual monthly volatility and the past three months has seen a clear change in direction," National Bank Senior Economist Khoon Goh said.
"We characterised last month’s decline in confidence as the economy merely shifting from a gallop to a canter," he said.
"Perhaps this month is seeing a shift from a canter to a trot."
The fall in confidence was broad and across all areas.
"Employment and investment intentions both fell 5 points to +8 and +5 respectively. The former is still flagging positive jobs growth ahead, but the latter has fallen below its historical average and does not portend of a marked pick up in investment spending in the near-term," Goh said.
"This is a worry from a supply side perspective. Not helping the investment case is the 10 point fall in profit expectations to +9. The largest decline was in the agricultural sector, where a net 2 percent now expect a lower profitability this month, compared to a net 15 percent expecting an improvement last month," he said.
"Perhaps farmers are already factoring in the possibility of downward revisions to the payout forecast after the recent fall in global dairy prices?
National Bank said its composite growth indicator was still pointing towards year-on-year growth in the 3% region by late this year, but this is down on the 4% percent plus it was flagging a few months back.
"Growth momentum is easing (or at least expectations towards it), but is far from being snuffed out," Goh said.
"Comfortingly for the RBNZ, pricing intentions fell 8 points to +31, pulling back from last month's surge. Tomorrow’s OCR decision is set to see the RBNZ raise interest rates by another 25 basis points to 3 percent. The majority of respondents are already resigned to the fact that interest rates are heading higher, with a net 83 percent expecting rates to rise over the next 12 months. But with signs that the economy is not surging away and momentum is levelling out, we find it difficult to envisage rates will move up every six weeks."
JP Morgan economist Helen Kevans said the Reserve Bank is likely to keep increasing the Official Cash Rate.
"With the economy set to grow at or above trend in coming quarters, the RBNZ is unlikely to risk leaving the policy rate at current stimulatory levels for too long," Kevans said.
"We, therefore, expect the RBNZ to deliver another 25bp hike in the official cash rate tomorrow, taking the key rate to 3%," she said.
"RBNZ Governor Alan Bollard will likely acknowledge recent weakness in the domestic data, such as retail sales and housing data, but flag upside risks to the medium-term inflation outlook. Indeed, more moderate growth in the domestic recovery is unlikely to deter the RBNZ from tightening policy further, although it has added weight to the possibility of a pause later this year. A pause, in our view, at this stage is unlikely, providing that the domestic data flow firms and the global picture does not deteriorate further."