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According to National Australia Bank (NAB), business confidence fell to -4 index points in the March quarter, marking its lowest level since December 2024.
Business conditions also edged lower, declining by 1 point to 7 index points, with weakness recorded across trading, profitability, and employment.
Despite the quarterly decline, conditions remain broadly consistent with the gains achieved through 2025. All three subcomponents unwound some of the previous quarter’s increases but continue to sit around or slightly below levels in the third quarter of 2025 (Q3), indicating that activity has held up overall.
Across industries, conditions declined in most sectors – with the exception of wholesale, manufacturing, and construction – which recorded modest gains.
Conditions remained positive in five of eight industries – led by finance, property, and business services – followed by construction. By state, conditions eased across all regions but remained positive, with Tasmania and Queensland the strongest performers.
Headwinds building beyond Q1
However, NAB’s Q1 data largely predates the escalation of conflict in the Middle East, which is expected to intensify pressures in coming months.
Higher interest rates and the prospect of further energy price shocks are now raising the risk of business failures, according to new analysis examining insolvencies, arrears, and sector exposure.
Sectors with high fuel and power usage are under acute cost pressure, according to the latest Business Risk Index from CreditorWatch, which highlighted increasingly difficult operating conditions across agriculture, mining, manufacturing, construction, and road transport.
The agency also warned insolvency numbers are likely to climb as growth slows.
CreditorWatch CEO Patrick Coghlan commented on the immediate pressure facing businesses, which must now contend with cost pressures on multiple fronts.
“Australia’s small and medium sized businesses are facing one of the most challenging operating environments we’ve seen in years, with cost pressures, interest rates and global volatility all converging at once,” he said.
“The data is clearly showing that these pressures are feeding through to cash-flow stress, slower payments and a rising risk of business failure, particularly for smaller operators with limited buffers. These indicators underscore just how exposed many SMEs are to sustained economic shocks.”
Inflation, rates, and fuel keep outlook uncertain
A separate survey of SMEs conducted by Banjo Loans found inflation and rising costs remain the primary constraints on business growth, with nearly half of respondents identifying them as their biggest challenge.
Australia’s annual inflation rate came in at 3.7 per cent in the 12 months to February 2026 – lower than January – but still above the Reserve Bank of Australia’s 2–3 per cent target band.
Notably, the February data does not yet fully reflect the impact of the Middle East conflict, which is expected to be captured in upcoming figures from the Australian Bureau of Statistics.
Persistent inflation, a tight labour market, and ongoing global volatility have already prompted the central bank to lift the cash rate by 25 basis points – from 3.85 per cent to 4.1 per cent – with another increase in May still a possibility.
Adding to the uncertainty, CreditorWatch chief economist Ivan Colhoun warned sustained high oil prices could have far-reaching consequences for both businesses and households.
“A sustained oil price of over US$125–150 per barrel will seriously pressure consumers’ budgets and business’s costs, and substantially increase the probability of recession,” he said.
“The RBA’s February interest rate rise adds to that pressure, though I would expect the Bank’s Board to not raise interest rates again in May, while it seeks to understand the longevity and impacts on the economy from current oil prices.
“The implications for businesses are quite clear. As long as oil prices remain very elevated, there will be increased pressures on many businesses and unfortunately the likelihood is of an increase in insolvencies. There is also the risk that fuel supplies are significantly disrupted throughout the economy, causing a COVID-like shutdown event.”
[Related: SMEs ‘getting ahead of the curve’ as credit demand holds firm]
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