Jan. 17 (Bloomberg) -- New Zealand businesses are the most pessimistic in 20 years, raising the risk of a recession, the New Zealand Institute of Economic Research said.

About two-thirds of 524 businesses surveyed last month expect the economy will get worse in the next six months, the institute said in a report released today in Wellington. Fourth-quarter trading was the worst in seven years and 36 percent of companies expect first-quarter profits will decline.

The report suggests Reserve Bank Governor Alan Bollard's nine interest-rate increases in the past two years may have stalled the $97 billion economy late last year, said Brent Layton, director of the institute. The outlook for first-quarter trading suggests the economy could contract for two straight quarters, he said.

``A downturn has been underway for some time,'' Layton told reporters. The results ``significantly raise the possibility we get two negative quarters of gross domestic product in a row.''

The New Zealand dollar fell to as low as 69.25 U.S. cents from 69.8 cents before the announcement. It bought 69.48 cents at 5:15 p.m. in Wellington.

Companies' assessment of their own trading the next three months fell to the lowest in almost eight years, he said. Their view of the economy fell to the lowest since the first quarter of 1986, Layton said.

About 65 percent expect the economy will deteriorate in the next six months. Just 4 percent expect the economy will improve.

Interest Rates

New Zealand's benchmark official cash rate is 7.25 percent, the highest of any nation with the top credit rating at Moody's Investors Service. Twelve of 13 economists surveyed by Bloomberg News expect Bollard will keep the rate steady at his next review on Jan. 26. One expected a rate increase.

``This will cause the Reserve Bank to sit up and look,'' said Robin Clements, chief economist at UBS New Zealand. Firms' assessment of their own business outlook ``has dipped into territory that is consistent with recession.''

About 36 percent of the companies surveyed said it was harder to find skilled workers than three months earlier, from 44 percent in October. Just 19 percent said finding labor was most limiting their ability to increase production, while 57 percent said poor sales most limited their ability to expand.

Prices Increases

Capacity utilization, or the ability of companies to boost production without needing to raise prices, fell to 91.5 percent from 91.9 percent in the third quarter, the institute said. The index was a record 92.6 in the fourth quarter of 2004.

Businesses either invest in more plant and workers, or will raise prices to ration demand.

About 40 percent of companies expect to increase prices in the next quarter, according to the survey. That's more than the 34 percent in the previous survey.

About 24 percent of companies said they will cut their workforce this year compared with 14 percent in the previous survey.

To contact the reporter on this story: Tracy Withers in Wellington, New Zealand at twithers@bloomberg.net.

Last Updated: January 16, 2006 23:28 EST