Business confidence in Australia lifted off a low base, however it is still weak and margin pressures are likely to remain a factor for businesses in the months ahead, National Australia Bank (ASX:NAB) said in a report on Tuesday.

Business confidence rose 10 points to negative 14 index points in May, according to the NAB Monthly Business Survey. Sentiment remains negative across all industries despite the increase, and overall conditions continue to track below average through the year.

Business conditions were steady at 3 index points in the month and tracking just below their long-run average for most of the year, with employment, trading conditions, and profitability all having softened since February. The profitability sub-component is furthest below its long-run average, which suggests margin pressures persist.

Conditions rose in wholesale, finance, property, and business services as well as recreation and personal services industries. Trend conditions were strongest in mining and finance, property and business services while manufacturing was the weakest industry. By state, conditions rose modestly in New South Wales and South Australia.

Capacity utilization fell to 81.9%, dropping below 82% for the first time since early 2025, and is currently 1.4 percentage points below its high point in late 2025. While utilization remains above its long run average of 81.4%, the easing through the first half is consistent with softer economic growth and also reflected in the broader trend in business conditions.

The survey suggests activity has slowed somewhat and that, while the Middle East cost shock has been significant, it has been less disruptive than feared, said Gareth Spence, the bank's head of Australian Economics.

This "supports the view that economic growth has slowed since late 2025 but is still moving. We see the same signs in our transactions data, where spending growth has slowed but not fallen away," Spence said.

Forward orders rose five points and capital expenditure lifted six points. Purchase cost growth eased to 2.6% in quarterly equivalent terms, while labor cost growth edged down to 1.5%, product price growth slowed to 0.9%, and retail price growth eased to 1.5%.

Price and costs growth also eased in the month but remain elevated, particularly purchase costs, which signal the ongoing risks of the cost shock due to the Middle East conflict still making its way through supply chains, per the report.