Business confidence has lifted to the highest level in almost six years, helped by federal government measures to support the economy, stock market rallies and encouraging signs from abroad, a report shows.

The National Australia Bank (NAB) monthly business survey's measure of business confidence increased eight index points in August to plus 18 points.

It was the highest level since October 2003 and "well above long-run average levels", NAB said in the report released on Tuesday.

NAB said the rise in business confidence was due to "macro forces" such as "policy stimulus locally and more signs of stabilising global economies and improving equity markets".

The improvement was most pronounced among in the retail, finance, manufacturing and recreational and personal services sectors, while construction and transport businesses reported lower confidence.
RBC Capital Markets senior economist Su-Lin Ong said the lift in confidence, along with recent data showing a rise in job advertisements, supported the case for the Reserve Bank of Australia (RBA) to start raising interest rates "sooner rather than later".

RBC expected the first interest rate rise to occur in November, but Ms Ong said "October could be a close call if the data in the coming weeks continue to surprise to the upside".

NAB also expected the RBA to start lifting the cash rate in November, from a 49-year low of three per cent, with further hikes of 25 basis points pencilled in for December and February.  (The RBA board does not meet in January.)

"This better domestic outlook and much better confidence levels further erodes the case for maintaining emergency lows in interest rates," NAB chief economist Alan Oster said.

However, the jump in confidence was not matched by the survey's measure of actual business conditions, which rose three index points to plus four points in August.

Still, it was the highest level since May last year and "approaching long-run average readings".
Business conditions are determined by respondents' views on trading, profits and employment.
The NAB report found that trading and profits were improving but firms continued to shed jobs and cut back the working hours of existing staff.

Forward orders declined, business investment intentions for the next 12 months were basically unchanged from three months ago and there was little sign of any pickup in capacity utilisation.
Mr Oster said the gap between confidence and conditions suggested business may be a little too optimistic for current circumstances.

"While these outcomes are very encouraging, to some extent we suspect that current confidence levels may be starting to get to unrealistic levels - just as they fell to overly pessimistic levels earlier in the year," Mr Oster said.

"We are increasingly concerned that confidence may be getting substantially ahead of reality."
The survey of 550 firms across the non-farm business sector, conducted between August 24 and 24, prompted NAB to upgrade its economic forecasts.

The bank now expects gross domestic product (GDP) to expand by 0.5 per cent in calendar 2009, compared with a previous forecast for a flat outcome, before growing by about two per cent in 2010.
GDP growth was tipped to be positive in the September quarter, but negative in the December quarter, NAB said.

ANZ Banking Group economist Riki Polygenis said the business survey was consistent with further growth in the Australian economy over the second half of 2009.

The revision to growth was also reflected in NAB's forecast for unemployment, which it now tipped to peak at 6.7 per cent in late 2010, an improvement from the 7.3 per cent peak forecast in July.

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