Overview

Business conditions eased again in May to 0 index points. Conditions have fallen steadily over late 2024 and early 2025; in trend terms the series has eased from around average at +6 index points in September 2024 (to +2 index points currently). The decline in business conditions in recent quarters has narrowed the gap between business confidence and business conditions; it will be hard for confidence to lift sustainably if conditions deteriorate further. Business confidence improved again in May, though trend confidence remains below the long run average. Capacity utilisation rose to 82.3% from 81.4%, partially reversing the large decline seen in April. Profitability remains weak at -4 index points and the employment index fell 3pts (unrounded) in May to a new cyclical low. Price indicators were mixed: labour costs growth was robust (1.7% in quarterly equivalent terms), purchase costs growth eased (1.1%), as did final product price growth (0.5%). In contrast, retail price growth held steady at 1.2% in April. Overall, this survey highlights that business conditions remain weak amid ongoing profitability pressures and soft demand, with signs of a further softening in labour demand. At an industry level, we note that retail conditions and confidence have both declined over 2025, after a small recovery in late 2024, which aligns with softer than expected household consumption growth this year.

Comments from NAB Chief Economist, Sally Auld

Business conditions eased again in May. By subcomponent, employment conditions weakened (down 3pts unrounded) while trading and profitability both remain well below long run average levels.

“Our trend business conditions measure has fallen steadily since late 2024 despite the pick-up in activity over the past two quarters,” said NAB Chief Economist Sally Auld. “Weak profitability is a key driver, which remains in negative territory.”

Business confidence improved, which has narrowed the gap between business conditions and confidence. Confidence remains weakest in retail and wholesale; all other industries except finance, business and property services recorded positive business confidence in May.

“By industry, the persistent weakness in retail business conditions and confidence aligns with the softer than expected pick-up in consumption over Q1,” said Dr Auld. “Our measures of profitability and trading conditions are notably weaker in retail than other industries.”

Capacity utilisation rose to 82.3%, while capex also picked up to +6 index points. Forward orders remain soft at -2 index points, compared to the long run average of +1 index points.

Price indicators were mixed, labour costs growth was robust (1.7% in quarterly equivalent terms), purchase costs growth eased (1.1%), as did final product price growth (0.5%). Retail price growth remained at 1.2%, reflecting ongoing profitability pressures.

“Overall, business conditions remain weak. If this continues in coming months, it will be difficult for confidence to rise from current levels. We will watch whether there is a more sustained softening in labour demand, with the employment index easing to below average levels.” said Dr Auld.

For more information, please see the NAB Monthly Business Survey (May 2025)