Confidence in the economy has fallen to its lowest level in three years amongst New Zealand's small-to-medium sized enterprises, which makes up more than 500,000 businesses, according to the latest MYOB Business Monitor survey of more than 1,000 business operators around the country.

Expectations for the economy fell from an overall net positive 21% in the March 2017 Monitor, to a net negative 14% in the latest survey.

This is despite businesses continuing to report strong levels of revenue growth over the last 12 months and positive earnings expectations for the coming year.

Businesses in the primary sector are most likely to predict the economy to decline, with over half of the operators in the industry (52%) pessimistic about the coming year.

Manufacturing and wholesale business operators are also concerned about a fall-off in the economy, with 41% expecting a decline.

Construction and trades business operators are only slightly more optimistic, with 38% expecting the economy to decline while 26% predict it will improve.

As the investment in the city's rebuild tapers off, Christchurch-based business operators are the most pessimistic about economic conditions this year with 48% expecting to see the economy decline, followed by Auckland (43% expecting a decline) and business operators outside the main centres (38%).

Wellington business operators are finely balanced, with 36% expecting conditions to decline and 35% predicting an improvement in the economy.

Despite expressing a significant level of concern over the future of the economy, the performance of New Zealand's SME businesses remains largely unchanged from the strength it showed in the last year.

36% of businesses reported an improvement in revenue in the last 12 months, the same level as 2017 and only a slight decline from the highest level recorded in the Monitor survey in 2016 (37%).

A fifth (20%) reported a fall in revenue levels in the last 12 months.

Most business operators are also forecasting their revenue will improve or remain at current levels over the next 12 months, with 38% expecting revenue to rise (the same proportion as in 2017) and 41% predicting their income will remain the same.

MYOB general manager Carolyn Luey says while businesses are right to express some caution, as the international situation, in particular, is increasingly uncertain, there's a risk that the growing levels of pessimism could affect the economy.

“The fundamentals of the SME economy at present are strong – businesses, in general, are doing very well, and most expect that performance to continue over the next 12 months,” says Luey.

“While there are some areas to watch – such as the decline in manufacturing sector earnings and lower levels of revenue growth for the primary sector – the overall sector is in good shape.

Luey says that despite the lack of confidence in the economy, there are other strong signals that business will improve over the coming year.

“Most of the growth signals we look for, such as increased work in the pipeline, new jobs and wage growth are present in this survey – they are just not reflected in the overall sentiment.

A third of businesses have more work in the pipeline in the coming quarter, and a further 48% are reporting consistent levels of sales or orders for the next three months.

Just 16% are expecting activity to reduce in the coming quarter.

Among the sectors, the construction and trades industry (44%), the retail and hospitality sector (44%) and the wholesale and manufacturing industry (41%) – despite predictions of falling revenues in the industry – are all expecting a strong quarter.

Employment growth will remain steady, with 11% of businesses planning to increase the number of staff in their business.

With continuing demand for housing, the strongest employment growth will be in the construction and trades sector, with 20% of business operators planning to increase the size of their workforce.

Just under a quarter (24%) of operators surveyed are planning an increase in wages and salaries.

Pay increases are most likely in the manufacturing and wholesale industry (41%) and the retail and hospitality trade (36%).

Carolyn Luey says there are a wide range of considerations contributing to the large fall in confidence amongst SME operators.

“The level of uncertainty around the policies and direction of the new Government has been well canvassed in recent surveys,” says Luey.

“But other concerns, such as a looming international trade war, global instability and, closer to home, the range of new taxes being mooted by the tax working group – all of which were covered during the survey period – are likely to be factoring into how well business operators believe the New Zealand economy will perform.

“Overall though, we hope business operators can take heart from the strength of their own performance, and that of their peers, and recognise that there are a great many positives to take forward into 2018.