(Bloomberg) -- New Zealand businesses are less pessimistic about the outlook for the economy but remain downbeat about their own trading prospects, according to a third-quarter survey by the New Zealand Institute of Economic Research.

A net 42% of firms expect the economy to deteriorate in the next 12 months, down from 62% in the second quarter, the institute said Tuesday in Wellington. However, a net 14% expect their own trading will get worse in the fourth quarter.

Businesses are being buffeted by rising costs and slowing demand as the central bank raises interest rates, while they are also struggling to find workers in a tight labor market. Investment fell and more than a third of firms reported falling profitability in the third quarter, adding to signs that economic growth will slow through 2023.

“Demand looks to be stabilizing at a lower level,” said NZIER Principal Economist Christina Leung. “The results suggest a period of weaker growth but with a lower risk of the New Zealand economy slipping into recession.”

Finding labor is the biggest constraint on companies being able to increase revenue, the survey shows. Still, fewer firms said they were having difficulty in finding skilled and unskilled labor, which reflects the end of the wave of Covid infections and improving availability of foreign workers, Leung said.

Weaker sales also emerged as a constraint on growth, suggesting that higher interest rates are having their intended impact by damping demand, she said. 

Almost three-quarters of firms continue to experience rising costs but fewer expect to raise prices in the fourth quarter, suggesting inflation peaked in the second quarter, Leung said.

“Cost pressures remain intense,” she said. “There is still a need for higher interest rates over the coming year.”

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