Business sentiment has bounced back to its highest levels since October, but inflation pressures are still weighing heavily on businesses, as retailers look to raise prices.
ANZ Bank's monthly survey of businesses suggested a net 79 percent of retail businesses
intended to raise their prices in the next three months in line with increasing costs, as did 66 percent of the manufacturing businesses surveyed.
Overall business pricing intentions rose 3 points compared to last month, while cost expectations rose 7 percent.
The bank's chief economist, Sharon Zollner, said it seemed the summer break had improved business sentiment.
"It's encouraging to see a bit of a lift in business confidence and activity expectations in the survey in January but it does have to remembered that the levels are still very subdued and consistent with the slowdown in the economy over the months ahead."
She said the Reserve Bank still has a big job to do bringing inflation down from 7.2 percent to its targeted 2 percent.
Almost a third of construction businesses surveyed expected their staff levels to be lower in 12 months' time, citing staff shortages and rising wage expectations.
It comes after Stats NZ data this week showed construction prices were up 14.1 percent in the year to December.
ANZ chief economist Sharon Zollner said it was encouraging to see a modest bounce-back in business confidence and activity expectations, but signs were still pointing toward an economic downturn.
"It does have to be remembered that the levels are still very subdued and consistent with a slowdown in the economy over the months ahead," she said.
"There was some data in there that was a bit less encouraging - in particular the pricing and cost expectations, inflation expectations are stuck at 6 percent and that does suggest the Reserve Bank of New Zealand has more work to do."
Zollner anticipated the RBNZ would raise the official cash rate by another 50 basis points next month.
"While that's a step down from the 75 basis points we saw in November, it's still double speed at a time when things like job ads and business confidence are looking subdued, so it is still a very unusual situation that we're in."
She said it was unclear where the chips would fall in terms of a recession this year, but inflation should trend downwards this year, with airfare and petrol prices dropping.
"At the moment, we're in a situation that with business confidence weakened, it looks like economic activity is likely to weaken over the next six months, but inflation pressures are still very high.
"But that doesn't mean that monetary policy isn't working, it just always works with a lag, it impacts confidence and investment and employment decisions and then eventually activity and then eventually inflation.
"The Reserve Bank's conundrum is do they just have to sit back and wait to see the impact of what they've done already, or do they actually need to do more?"
Zollner said it was unclear how much business pessimism would dent activity.
"In the economy, interest rates have risen a long way very fast but only a third of households even have a mortgage, and of course a lot of those have paid it down significantly and we shouldn't forget the savers, who are delighted to see interest rates going up.
"China's economy is looking like it'll rebound from their Covid lockdowns, so it's not all doom and gloom but always in the back of your mind, you've got the fact that if the economy doesn't slow down, then the Reserve Bank will keep raising rates until it does, because that's what's probably required at this point to get inflation down."
The concern was that the longer inflation stayed high, the more normalised it would become, which would fuel wage expectation and high commodity costs, she said.