Australia business activity stalls in May as retailers squeezed

SYDNEY (Reuters) -Australian business activity stalled in May as consumers kept their wallets shut despite a cut in interest rates during the month, a survey showed on Tuesday, while firms reported increased pressure on profit margins.

National Australia Bank's survey showed its index of business conditions edged down 2 points to 0 in May, well below the long-run average of around +6. Its confidence index inched up 3 points to +2, though that remained soft historically.

"By industry, the persistent weakness in retail business conditions and confidence aligns with the softer-than-expected pick-up in consumption over Q1," NAB chief economist Sally Auld said.

"Our measures of profitability and trading conditions are notably weaker in retail than other industries."

Consumers have remained reluctant to spend despite rate cuts in May and February, and a slowdown in inflation. Markets are wagering the Reserve Bank of Australia will ease again in July given the economy disappointed in the first quarter.

The NAB survey showed its sales index dipped a point to +5 in May, while employment dropped 4 points to 0. Profitability stayed weak at -4, with labour and purchase costs squeezing margins.

"We will watch whether there is a more sustained softening in labour demand, with the employment index easing to below average levels," Auld said.

The labour market has been resilient in the face of sluggish economic growth, with unemployment holding around 4.1% for most of the past year.

(Reporting by Wayne Cole; Editing by Himani Sarkar)

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