Business conditions have improved in January but remain soft overall, with signs the weaknesses in some sectors is spreading to others, a National Australia Bank monthly survey finds.

Business conditions improved to minus 2, up from minus 5 in December, as profitability and trading conditions registered gains while employment conditions ‘‘weakened considerably’’, NAB found.

‘‘I think the economy’s hit a soft patch and it is still there,” NAB’s chief economist Alan Oster said.

“People are a little bit more relaxed because the equity market’s gone up ... but I still think the economy is now starting to soften significantly and we’re seeing for the first time some signs that the stronger parts of the economy are starting to weaken a little bit.”

Inflation pressures low

Forward orders remained at low levels, ‘‘suggesting little upward momentum’’, while companies’ productive capacity utilisation were at their lowest levels since 2001.

Labour costs “softened significantly” last month, the survey found, suggesting that wages pressures were unlikely to lead to a short-term growth in prices.

Labour costs growth was the highest in the finance, business and property sectors, recording a quarterly rate growth of 1.6 per cent. In contrast, the construction industry fell 0.5 per cent while the recreation and personal services industries slid by 0.2 per cent.

Business credit demand was also at near record lows, the survey found.

‘‘Business conditions were generally better across interest sensitive industries in January, but fell heavily in mining,’’ the survey’s authors said.

‘‘Recent surveys have highlighted the gradual deterioration in conditions in recreation and personal services and transport and utilities - previous non-mining strong performers, This trend continued in January [and] it may well be that continuing weakness elsewhere is now spreading.’’

There was more positive news for business confidence, which edged higher following its sharp rise in December from financial crisis lows the month before, on the back of optimism about a global economic recovery.

The business confidence index rose by one point to 3 in January, after recording minus 9 for the month of November.

‘‘Interestingly, most industries reported a deterioration in confidence in January, but sharp improvements in mining and wholesale confidence were sufficient to lift the overall level,’’ NAB said.

At the same time, Mr Oster said the survey found that the recent floods in the north-east of the country did not appear have seriously affected business activity.

“When we had the floods a couple of years ago, we had massive effects in the survey … whereas it’s not obvious that’s happening here,” he said.

UBS economist George Tharenou said the slight improvement in business conditions was a “good outcome given still weak PMIs (purchasing managers index)”.

“Business confidence – which tends to lead conditions – also held onto its sharp rebound in December. This may provide an early signal of a ‘turning point’ in the domestic economy, consistent with our view the RBA will hold rates,” Mr Tharenou said.

But he added that the reduced inflation pressures and soft labour market point to a “very low” consumer price index in the next few months, keeping the door open for a continuation of the Reserve Bank’s easing cycle if unemployment is weaker-than-expected.

More rate cuts expected

National Australia Bank said it would continue to be more bearish than the Reserve Bank about its outlook for the Australian economy, with expectations of gross domestic product growth of 2 per cent for the year.

The bank said it still forecast the cash rate to be lowered to 2¼ per cent by the end of 2013, but with the first rate cut for the year to take place in May. Further easing of interest rates were forecast for June and November.

“I think the survey says that the economy hasn’t stopped and confidence is a little bit better, activity may not be quite as weak as it was but it is not great,” Mr Oster said.

“So … we say [the Reserve Bank] still needs to do a fair bit of rate cutting because the currency is not going down, fiscal policy is not helping and so the only thing left is basically monetary policy.”

Financial markets’ expectations of a rate cut in March currently stand at 52 per cent. The market has also priced in expectations of up to two 25 basis points rate cuts for the year.

Meanwhile, the Reserve Bank’s credit card balances report for the month of December found that the total balance rose to $49.9 billion from $49.5 billion in the month before.

The average credit card balance edged up slightly from $3262 in November to $3282 in December.