Australia business confidence hits 2-year high —survey

Office employees, Sydney
Saeed Khan | AFP | Getty Images

Australian business confidence surged in August as firms hoped a Federal election would put an end to political uncertainty, though Tuesday's survey showed actual conditions were weak with a worrying downturn in employment.

National Australia Bank's monthly survey of over 600 firms found confidence improved across all sectors following a cut in interest rates early in August and ahead of an expected victory by the conservative Liberal National Coalition in elections on Sept. 7.

(Read more: Australia's election is over, now what for the economy?)

The survey's main measure of business confidence shot up to 6, from -3 in July, the highest reading since May 2011 and the sixth largest monthly increase in the series' history.

The swing came despite a tough trading background, with the survey's measure of business conditions improving only marginally to -6 in August, from -7 in July.

Australian election result to boost sentiment?
Australian election result to boost sentiment?

"While it is difficult to prove, it is likely that expectations of political change and a decisive result were very important," said NAB's chief economist, Alan Oster.

The survey was taken from Aug. 20 and Sept. 3, when opinion polls indicated the business-friendly opposition would comfortably defeat the Labor government.

The polis proved correct, with the Coalition gaining a handy majority in the lower house of parliament to end three years of minority rule.

The brighter mood was reported across all industries and States, with major improvements in mining, construction and finance/business/property. Some sectors could have been further buoyed by a revival in the housing market and a lower Australian dollar.

(Read more: No 'Armageddon' for miners: Western Australia Premier)

Oster also noted there had been a solid and synchronized lift in business confidence across the advanced economies in recent surveys globally.

"That said (Australian) confidence is now only back to average levels and much will depend on whether the current bounce is maintained or erodes away in the face of poor business conditions," Oster cautioned.

Indeed, there was scant sign of much pick up in activity during August. The survey's index for sales stayed at a soft -5 in August, while that for profitability edged up to -9, from a very low -11.

Worryingly, the measure for employment dropped 4 points to -9, the lowest reading since 2009. Government figures on jobs are due on Thursday and analysts have been tipping an increase in unemployment to 5.8 percent, from 5.7 percent.

(Read more: Australia's central bank mangles message on A$, rates)

The risk of a further increase in unemployment is one reason many analysts think the Reserve Bank of Australia (RBA) will be forced to cut rates again, having eased to an historic low of 2.5 percent last month.

There should be scope for further easing if needed as Tuesday's survey confirmed a very benign background for inflation. Retail prices rose by just 0.1 percent at a quarterly rate, while labor costs moderated.

"We still expect the RBA to cut again before years end -- probably in November on the back of continuing low core inflation and a weaker labor market," said Oster.