Weak profitability and sliding confidence raise borrowing capacity concerns for brokers
A 10-point drop in profitability and a five-point fall in trading conditions dragged Australian business conditions into negative territory in August — the first time that's happened in six years.
The NAB Monthly Business Survey put the headline conditions index at -1, down five points and the weakest reading since August 2020. Profitability fell to -9 and trading conditions to 3, with both sub-indices now at post-pandemic lows. NAB economists described the weakness as "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.
Confidence extends its slide, cost pressures persist
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.
Borrowing capacity and mortgage rates in the firing line
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.
