Business conditions sink on virus worries

National Australia Bank's monthly business survey found its conditions index down six points at minus six points in August, unwinding most of the previous month's gain.

NAB Group chief economist Alan Oster said the decline was led by a drop in its employment index, suggesting while the Australian economy is generally starting to open up, the labour market is still weakening.

He said the deterioration in conditions was broad-based across the states, with sharp declines in Queensland, Tasmania and South Australia, but only a modest decline in Victoria.

"We had feared (Victoria) would be worse given Melbourne's stage four restrictions," Mr Oster said.

"The fact that the other states have seen a pull-back suggests that the virus continues to pose a risk everywhere, not just states with significant containment measures in place."

The business confidence index made only a modest six-point improvement to an index of minus eight points after falling sharply in July, indicating sentiment still remains fragile.

Mr Oster expects confidence will continue to be impacted by news around the virus, and combined with weaker forward orders and a low level of capacity utilisation, it suggests that conditions may also soften before they get better.

Given the sheer magnitude of the fall in economic activity in the June quarter, which confirmed Australia is suffering its first recession in decades, and the subsequent lockdowns in Victoria, the recovery will likely be protracted, he says.

This will also result in a further rise in the unemployment rate.

"Policy makers have provided unprecedented support but we think there will need to be more," Mr Oster said.

"This would help businesses and the economy recover more quickly and the focus can again return to growth."

Extra support is expected to be unveiled in the October 6 federal budget.

Australian Associated Press