New Zealand’s small businesses continue to lag behind counterparts in Australia and the UK, according to Xero’s first productivity benchmark for the sector.
The report found labour productivity fell to NZD $74.00 per hour worked in the March quarter, down from NZD $75.30 in the previous three months. It also remained below the long-term average of NZD $76.30.
Productivity per employee slipped to NZD $9,168.90 from NZD $9,389.30 a quarter earlier.
Warning signs
The results highlight ongoing pressure on small and medium-sized businesses as rising costs and margin pressures weigh on performance.
Xero's international comparison showed New Zealand consistently trailing Australia and the UK. The gap suggests a longer-term challenge rather than a one-off quarterly slowdown.
"It's disappointing we're not seeing the kind of improvement needed to lift the small business economy," said Bridget Snelling, Country Manager - Aotearoa New Zealand, Xero.
"Falling behind international peers like Australia and the UK is a reminder that lifting productivity needs to be a long-term priority," Snelling said.
He added, "The encouraging part is that there are clear levers - from digital adoption to skills and process improvements - that can help close that gap over time. Our small businesses can't afford to sit still; this needs to be a priority."
Sector snapshot
Manufacturing, construction and real estate services ranked among the country's most productive industries.
Hospitality remained the weakest performer, underscoring the challenges facing labour-intensive sectors.
Retail delivered the strongest improvement. Productivity rose 9.1% year-on-year over the past six months as businesses increased sales without significantly lifting hours worked.
Regional contrast
Hawke’s Bay recorded the highest productivity levels, helped by its strong manufacturing sector.
Otago remained among the weakest-performing regions due to its dependence on tourism. However, it posted the fastest improvement, with productivity rising 7.4% year-on-year over the past six months.
Focus on technology
Xero said stronger productivity growth will require greater investment in skills, infrastructure and digital adoption.
The company also pointed to artificial intelligence as a tool that could help businesses improve efficiency and free up time for revenue-generating activities.
"For small business owners, improving productivity isn't just an economic concept - it's a practical way to grow profits and lift wages, regardless of wider conditions," Snelling mentioned.
He concluded, "There are clear opportunities here. Businesses that invest in the right processes, skills and digital tools are better placed to free up time, focus on customers and drive growth."
Despite growing interest in AI and digital tools, confidence remains a barrier for many small businesses. Xero said wider technology adoption and targeted support for lower-performing sectors could help narrow the productivity gap and strengthen long-term economic growth.