The surprise fall in confidence levels came despite an agreement being reached on the mining tax and a record trade surplus in June, largely attributed to strong iron ore and coal exports.
The National Australia Bank’s (NAB) monthly business confidence index fell from four index points in June to two points in July.
A reading above zero indicates optimists outweigh pessimists.
“The surprise reflected an expectation that the deal on the mining tax may have boosted mining confidence,” the report said.
“While confidence in mining did kick up by 25 points to better align with very strong mining activity and profitability data, substantial falls in confidence in manufacturing, construction and retail more than offset the mining impact.”
The survey found business conditions also weakened, falling four points, which was further driven by retail and much lower construction activity after the stimulus package passed.
“Against that, mining activity remained strong and transport improved,” the report said.
“The main weakness was in trading and profits. Employment remained robust.”
It said employment remained at robust levels and increased by 1 point.
“Overall, however, aggregate confidence has now fallen continuously from January 2010 and is at the lowest reading since May 2009.”
It found that transport and utilities activity improved strongly in July while manufacturing and retail reported sizeable falls in business conditions.
“The latter result was disappointing and suggests last month’s improvement may have been a temporary blip to an ongoing declining trend,” the report said.
It also noted a marked decline in construction in July.
“The most likely explanation revolves around the passing of the peak in government construction spending, as well as a weaker housing construction market,” it said.
“As with the broader survey, the falls in construction were concentrated in profitability and trading while employment edged higher.”
The report said the falls were largely unexpected or viewed as temporary.
Meanwhile, the overall current business conditions index fell 3 points to 5 index points placing it a touch below the long term average.
Strong improvements in transport and utilities has seen the sector move to the second strongest sector in trend terms, behind mining.
NAB’s global growth forecast remains unchanged at 4.6 per cent in 2010 and 4.25 per cent in 2011.
The bank forecasts private consumption in Australia to grow from 3 per cent in 2010/11 to 3.75 per cent in 2011/12.