Six years of positive readings came to an end in August, with Australian business conditions falling into the red for the first time since 2020.
Profitability and trading conditions did most of the damage, according to the NAB Monthly Business Survey: profitability dropped 10 points to -9, and trading conditions fell five points to 3, pulling the headline conditions index down five points to -1 overall. Both sub-indices now sit at their weakest since the pandemic, a slide NAB economists called "broad-based across industries."
Westpac senior economist Luka Belobrajdic, writing on Westpac IQ, said the profitability sub-index result "suggests a growing share of firms are reporting margin squeeze, likely reflecting the combined impact of elevated costs and higher interest rates."
Belobrajdic added that the trading conditions outcome "points to a softening in demand conditions," even as household spending data had shown resilience through July.
Business confidence fell for a second straight month, down two points to -8 and now 13 points below its long-run average of +5, according to NAB. The result comes despite much of the initial hit from the Middle East conflict having unwound, with confidence still around seven points below its pre-conflict level in February.
NAB economists flagged elevated fuel prices and lingering global uncertainty as ongoing drags on sentiment, alongside the upside surprise in July's inflation figures, which had markets lifting expectations for further RBA tightening.
Cost growth was little changed in the month: purchase costs rose 0.1 percentage point to 2.3% quarterly, around 1.1 percentage points above their long-run average, while labour costs eased slightly to 1.9% quarterly. Capacity utilisation slipped 0.6 percentage points to 82.5%, unwinding part of July's spike but remaining above its long-run average — a sign the broader business environment, while cooling, hasn't lost all momentum.
Weaker profitability and softening demand raise the risk of a slower labour market down the track, which could weigh on borrowing capacity assessments for self-employed and small business clients. Persistent cost pressures, and the inflation surprise, keep pressure on the RBA's rate outlook, a key factor shaping mortgage rates heading into the final months of the year.
State results were mixed — Tasmania and Western Australia bucked the trend with strong conditions readings, while Victoria was the only state in negative territory — suggesting the impact on clients will vary significantly by region and industry.
Get the hottest and freshest property and mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
