Highlights

  • NAB's profitability sub-index fell 10 points to minus nine in August, reaching a new post-COVID low.
  • Purchase cost growth of 2.3% remained well ahead of product price growth of 0.8%, squeezing margins.
  • Trading conditions stayed positive and employment remained relatively steady, suggesting the immediate pressure is concentrated in profitability.
  • If the cost-price gap persists, weaker margins could increasingly affect hiring and Business investment.

The single most alarming number in the August NAB business survey was not the headline flip into negative territory. It was the profitability sub-index, which dropped 10 points in a month to sit at minus nine, a new post-COVID low. That is the line where soft Demand and stubborn costs meet, and in August it buckled.

Profitability is where the health of a business is ultimately settled. Firms can absorb weak sales for a while, and they can wear rising costs for a while, but when the two arrive together, the gap between what they pay and what they can charge decides how much pressure builds on margins. The August reading suggests that gap has become a significant problem across Australian businesses.

A Margin squeeze six months in the making

The mechanics behind the profit slump are unusually clear. NAB's survey showed purchase cost growth running at 2.3% in quarterly terms while product price growth managed just 0.8%. Firms are paying substantially more for their inputs than they are able to recover through selling prices.

NAB has indicated that cost growth has been running ahead of product price growth for almost six months. This is therefore not simply a one-month shock but a sustained squeeze, and the longer it persists, the more it erodes the buffers firms built up when demand was stronger.

The arithmetic is unforgiving. When costs rise materially faster than the prices a business can charge, margins compress over time. Eventually that shows up in the profit line, and in August it did, with a sharp deterioration in the survey's profitability measure.

Why firms cannot simply raise prices

The obvious question is why businesses do not just lift their prices to cover the higher costs. The answer sits in the state of the Australian consumer.

Households are behaving cautiously. The national accounts showed the household saving ratio rising to 6.5% as families chose to hold more money back, while consumption grew a subdued 0.4% in the June quarter.

Cautious shoppers can punish aggressive price increases. A business that attempts to pass its full cost increase through to wary customers risks losing sales altogether.

As a result, some firms may absorb part of the difference in their margins, protecting volumes at the expense of profit. That trade-off is reflected in the widening gap between 2.3% cost growth and 0.8% product price growth.

There is a broader signal in that dynamic too. When businesses lack the pricing power to fully pass costs on, it can eventually help cool inflation. The adjustment, however, may initially appear through weaker corporate profitability.

The rest of the survey confirms the pattern

Profitability did much of the damage in dragging the composite lower, but the surrounding detail is consistent with a margin story rather than a collapse in activity.

The headline conditions index fell five points to minus one, moving into negative territory. Trading eased five points to plus four, so activity is cooling but remains positive.

Employment was the most stable component, slipping just one point to plus three, suggesting firms have not yet materially reduced staffing in response to thinner margins.

That configuration matters. Businesses under margin pressure may initially retain staff while waiting to see whether conditions improve before taking more significant cost-cutting measures.

The August internals, with employment still positive and profitability much weaker, fit that pattern.

What it means for business Investment and jobs

The risk is that squeezed profits eventually feed into decisions that shape the wider economy, particularly hiring and investment.

There are already signs of restraint. Private business investment fell 0.5% in the June quarter, even though it remained 10.4% higher over the year, supported by areas including data-centre and AI-related spending.

The annual figure reflects activity accumulated over a longer period, while the quarterly decline provides a more immediate indication of softer momentum.

Employment has held up so far, both in the survey and in official data, although the labour market is loosening at the edges. Unemployment rose to 4.5% in July from 4.4% in June, while employment declined over the month.

If profitability remains weak, the pressure to reduce costs, including labour costs, could increase. That is the channel through which a margin squeeze can eventually become a broader jobs and investment issue.

The policy backdrop offers little relief

Businesses looking for relief from lower borrowing costs are unlikely to find it immediately.

The Reserve Bank has kept the cash rate at 4.35%, while continuing to signal that policy could tighten further if Inflation does not cool sufficiently.

Trimmed-mean inflation remains at 3.6%, above the 2% to 3% target band.

That leaves firms caught between two pressures they cannot easily control: input costs that are difficult to fully pass on and interest rates that remain elevated.

Neither side of the squeeze is easing decisively yet.

What to watch next

The key gauge from here is whether the gap between purchase costs and product prices narrows.

If cost growth eases closer to selling-price growth, margins could begin to stabilise even without a major improvement in demand.

If the gap remains wide, profitability is likely to stay under pressure and the strain could increasingly show up in hiring and investment decisions.

The next business survey will also show whether the minus-nine profitability reading was a temporary low or evidence of a more persistent deterioration.

For now, the message from August is that Australian businesses are being squeezed less by a sudden collapse in customers than by a persistent gap between what they pay and what they can charge. It is a quieter form of pressure than a demand shock, but the profitability index shows that it can still have material consequences.