Business conditions in Australia fell 3 points to minus 2 in the third quarter, marking the first negative reading since September 2020, as profitability waned and the trading environment weakened, according to National Australia Bank's quarterly business survey released Thursday.

Business confidence, meanwhile, increased 8 points to minus 11, remaining in negative territory but partially reversing a sharp decline seen in the previous quarter.

"Renewed margin pressure was a key development in the quarter" as businesses navigated a challenging cost environment, said NAB Chief Economist Sally Auld.

She noted that sales margins fell by a further 4 points to minus 20, hitting their lowest level since June 2020, while purchase costs growth of 1.2% in the quarter outpaced the 0.5% increase in final product prices.

"That gap is squeezing margins and leaving firms with less scope to absorb higher costs or pass them on to customers," Auld said.

Labor costs and availability were also a considerable challenge as labor cost growth increased to 1.2% quarter over quarter, and the share of firms pointing to labor as a significant constraint on output rose by 2 points to 29%.