Business conditions improved in the June quarter but that could be unwound by negative sentiment from the federal budget, NAB economists warn.

Business conditions are picking up, but could be under threat from the negative reaction from consumers to the federal budget’s proposed spending cuts.

Business conditions improved in the June quarter while confidence dropped off slightly but remained resilient, figures from the National Australia Bank’s latest quarterly survey showed on Thursday.

Confidence fell one point to six, while conditions rose from zero to one point.

Business conditions were gradually improving, NAB economists said, but still pointed to relatively subdued domestic demand.

“With business activity seemingly on the rise, business may be able to maintain confidence at these levels for longer,” NAB economists said.

“However, an immediate risk stems from the recent collapse in consumer confidence and the rise in consumer anxiety that followed the government’s tough budget handed down in May.

“If this flows into consumer spending behaviour – tentative signs of which have already become evident – then it would only be a matter of time before firms react with a similarly negative response.”

Of the mainland states, conditions were weakest in Queensland, possibly reflecting tighter fiscal spending, the drought, a tough market for coal producers and the impact of the high Australian dollar on tourism, the report said.

On a positive note, low interest rates and a rise residential construction remained a source of support for businesses.

An anticipated fall in the Australian dollar, which has been trading around 94 US cents recently, would also help.

Recreation and personal services along with finance, property and business services reported the best business conditions during the quarter, while mining remained very weak.

The strong Australian dollar was having a mixed impact on business, the report said, hindering some while helping retailers and wholesalers.

“Clearly import competing and trade exposed sectors see the currency as a headwind. But retailers and wholesalers now appear to be seeing benefits from Australian dollar strength via reduced purchase costs,” the economists said.

Business investment intentions picked up in the quarter, approaching levels consistent with improved non-mining capital expenditure.

The employment index also lifted but still suggested modest rates of employment growth, meaning the unemployment rate would rise further from its current level of six per cent, NAB economists said.