Small businesses have shown the strongest growth outlook in two years in the last quarter.

ANZ's Business Micro Scope survey shows that composite growth in Wellington rose to its highest levels since data was first collected in 2007.

Growth in Auckland and the regional North Island increased, but activity, employment and profit expectations fell in the South Island.

Headline confidence for small businesses eased in the March quarter, falling from 6 points to a net of 14%, but other key indicators correlated to growth lifted.

“It's been a solid start to 2017, with good growth prospects for small businesses led by the manufacturing and service sectors,” ANZ retail and business banking managing director Antonia Watson says.

“Small businesses make up over 90% of New Zealand's businesses, so it's fantastic to see they're hiring and most sectors will look to invest in 2017,” she adds.

The quarterly survey again highlighted a significant problem holding back small businesses – a shortage of skilled labour.

“They're not finding talent with the right skills. It's a handbrake for growth and has been identified as their biggest challenge over the last year,” Watson says.

Highlights from 2017 ANZ Business Micro Scope survey:

• Growth composite measure for small firms reached its highest mark of two years at +21.
• 32% of small firms expect a lift in their business activity over the next year.
• Stabilising dairy prices and buoyant horticulture sector has lifted activity expectations among agriculture-sector firms to the highest level in two years (+23%)
• Construction firms recorded the largest fall (-12%) in hiring expectations, mirrored by the Canterbury small business employment outlook (-14 points)
• Wellington surged on employment and investment expectations (+35%) followed by regional North Island (+18%).
• Lack of skilled staff, regulation, competition, and low turnover are the top of small business owners' concerns.