Business confidence rebounded in May, but sentiment remains firmly negative and underlying conditions suggest the economy continues to cool under the weight of higher interest rates.
The NAB Monthly Business Survey showed business confidence rose 10 points to -14 index points in May, recovering from a low base but remaining below zero across all industries. Business conditions were unchanged at 3 index points, remaining below the long-run average, while capacity utilisation fell 0.5 percentage points to 81.9% — the first reading below 82% in a year.
Confidence improves from low levels
Forward-looking indicators strengthened during the month, with forward orders rising 5 points and capital expenditure intentions lifting 6 points. However, profitability weakened further and overall business activity remains softer than earlier in the year.
NAB Head of Australian Economics Gareth Spence said the survey pointed to slower but still positive economic growth, with business conditions easing from earlier highs as interest rates continue to restrain activity.
He said confidence had improved from very weak levels but remained subdued, with margin pressures likely to persist despite some easing in costs.
"The shock has clearly been significant, but so far it doesn't look like the disruption to supply chains has been as bad as we had feared," Spence said.
"Conditions have eased since early 2026 but remain positive, and they are not as weak as confidence suggested a month ago."
Cost pressures ease but remain elevated
Cost and price pressures moderated during May, though they remain elevated relative to levels consistent with the Reserve Bank of Australia's inflation target.
Purchase cost growth eased to 2.6% on a quarterly equivalent basis, labour cost growth slowed to 1.5%, product price growth eased to 0.9% and retail price growth moderated to 1.5%.
CreditorWatch chief economist Ivan Colhoun said the moderation was welcome but not enough to remove concerns about inflation.
He noted that cost and price measures remained above levels likely to be consistent with the RBA's 2.5% inflation target, while the recent 4.75% increase in minimum and award wages would add further pressure.
Underlying conditions weaker than headline suggests
While the headline business conditions index was unchanged, Colhoun argued the result masked weakness across much of the country.
A sharp rise in Tasmania's volatile conditions reading offset softer outcomes in Queensland, Western Australia and Victoria, while conditions in New South Wales remained subdued. Manufacturing, transport and retail businesses continued to report weak trading conditions, reflecting the impact of higher borrowing costs and fuel prices.
Forward orders improved from April's weak reading, providing some encouragement that activity is not deteriorating sharply despite the softer economic backdrop.
RBA balancing slower growth and inflation risks
Both economists highlighted capacity utilisation as a key measure for policymakers. The indicator has eased in recent months and fell further in May to 81.9%, suggesting some cooling in economic activity as higher interest rates work through the economy.
For the RBA, the survey presents a mixed picture. Business confidence remains weak and conditions are trending lower, supporting the view that growth has slowed since late 2025. However, cost and price pressures remain elevated, complicating the central bank's efforts to return inflation to target.
The survey is unlikely to alter expectations for the RBA's next board meeting, with Colhoun expecting rates to remain unchanged. However, weak confidence, declining capacity utilisation and persistent inflation pressures suggest the central bank will continue to walk a fine line between supporting growth and containing inflation in the months ahead.