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The result marks a turnaround from earlier this year, when conflict in the Middle East triggered the second-largest fall in business confidence in the survey’s history, despite underlying business conditions remaining relatively resilient.
According to the latest National Australia Bank (NAB) Quarterly Business Survey, business conditions rose five points to their highest level since the second quarter of 2024, while business confidence improved for a fourth consecutive quarter to return to positive territory for the first time since the final quarter of 2022.
Leading indicators also continued to strengthen, with forward orders returning to positive territory after five consecutive quarters of improvement, while businesses’ expected conditions over the next three and 12 months climbed to multi-year highs.
Confidence returns
The business confidence improvement was broad-based across the economy.
Profitability rebounded from -4 index points to +4, while trading conditions and employment more than reversed the declines recorded in the previous quarter.
Business conditions improved most in manufacturing, retail and finance, property and business services, while South Australia recorded the strongest increase among the states, rising 16 points.
NAB’s survey found that business conditions are now positive across every state.
Business confidence also improved across all states and is now at its highest level since the third quarter of 2022.
Despite the stronger outlook, businesses continued to identify wage costs and pressure on margins as the two biggest issues weighing on confidence.
Labour cost growth remained unchanged at 1 per cent during the quarter while purchase costs also held steady. Retail price growth eased to its slowest pace since mid-2020, while final product price growth was unchanged for a third consecutive quarter.
Business pressure remains for many
While sentiment has recovered, broader indicators suggest many small and medium-sized enterprises (SME) continue to operate in a challenging environment.
Headline inflation has eased in recent months, but businesses continue to contend with higher operating costs, elevated interest rates, margin pressure and labour expenses.
Broker Daily recently reported that SME late payments have climbed to their highest level in six years, with brokers being urged to have more proactive conversations around working capital as businesses prepare for Payday Super reforms and higher minimum wages.
Separate research has also shown asset-backed lending becoming increasingly mainstream, with almost half of Australian SMEs now using some form of asset-backed finance as businesses seek more flexible funding structures.
Warning signs remain
CreditorWatch’s latest Business Risk Index, however, suggests financial pressure remains concentrated across certain parts of the economy, despite the improvement in overall business confidence.
The credit reporting agency said payment defaults have risen in recent months, while Australian Taxation Office (ATO) tax defaults continue to increase, signalling financial stress may still be building beneath the improving sentiment.
Waste services has emerged as one of the sectors under the greatest pressure.
According to CreditorWatch, insolvencies in the sector are running at more than three times the national average, while payment defaults and 60-plus day arrears remain close to record highs.
CreditorWatch chief executive Patrick Coghlan said the combination of elevated arrears, payment defaults and insolvencies pointed to pressure becoming increasingly concentrated.
“What we’re seeing in waste services is one of the clearest signals yet that credit risk in Australia is becoming more concentrated, more fast-moving and more behavioural,” he said.
Coghlan added that higher interest rates, wage costs, compliance expenses and lingering cost pressures would continue weighing on businesses, even if energy markets normalised in the months ahead.
While ASIC data showed first-time insolvencies fell to a two-year low in May, CreditorWatch said rising payment defaults and ATO tax defaults pointed to further pressure building beneath the headline figures.
Coghlan said: “The businesses that will navigate this environment best are the ones that can spot stress early – in payment behaviour, arrears and changing trading patterns – and act before those pressures turn into serious financial distress.”
[Related: How Payday Super could trigger ‘structural shift’ in SME lending]
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