The odds of an August rate cut have shortened significantly as business conditions hit a four-year low in June amid "intense weakness" in the retail, mining and manufacturing sectors.
The move came as the International Monetary Fund late on Tuesday lowered its global growth outlook to slightly above 3 per cent for this year and 3.75 per cent for next year. This is about 0.25 per cent weaker than its previous forecast in April.
The updated forecast was driven by "appreciably weaker" domestic demand and slower growth in key emerging economies and continued recession in the eurozone, the IMF said.
However it upgraded its growth forecast for Japan, Australia's second-biggest trading partner, to about 2 per cent while it issued a gloomy outlook for Europe, saying the region would remain in recession this year. The IMF report did not break out any figures for Australia.
Even so, National Australia Bank on Tuesday brought forward its cash rate cut forecast from November to next month, after its June business survey painted a "worrying picture of the Australian economy" despite lower interest rates and a falling Australian dollar.
Business confidence remains subdued, rising slightly from minus 1 in May to zero.
"The domestic economy still looks pretty weak," NAB head of Australian economics Rob Brooker said on Tuesday.
"It's a continuation of a downward trend in business conditions that we've seen in the last couple of years. It's an economy that's still struggling. It's growing below trend and I think there are still some areas of quite intense weakness."
Financial markets were pricing in a 57 per cent chance of a rate cut in August, up from 37 per cent on Monday.
The Australian dollar fell to as low as US90.83¢ after the survey results were released, before rebounding to trade at about US91.73¢ late on Tuesday.
The monthly survey came as new data showed a record number of insolvent debtors entered into debt agreements during the 2012-13 financial year, according to the federal government's Insolvency and Trustee Service Australia (ITSA).
Bankruptcies rose 8 per cent in the June quarter compared with the March quarter, when they were at their lowest level since the March quarter of 1996, ITSA chief executive Veronique Ingram said. "Economic conditions are the most common business-related cause of personal insolvency," Ms Ingram said.
Citi economists on Tuesday also cut back their growth forecast for China from 7.6 to 7.4 per cent for this year, amid tighter credit conditions and a central government emphasis on financial reform above economic expansion.
Mr Brooker said the mining sector was "a lot weaker" than one or two years ago.
The survey's employment sub-index, which remained on a downward trend, was also an indicator of the weakening jobs market, Bank of America Merrill Lynch economist Alex Joiner said.
Mr Brooker said there were some bright spots in the survey, with positive conditions in the transport and utilities sectors and the finance, business and property services sectors.
Shadow treasurer Joe Hockey said uncertainty over the date for the federal election was putting a damper on business conditions, after the survey showed the election could be weighing on businesses' capital expenditure plans.
However, a Roy Morgan survey released on Tuesday pointed to a lift in consumer confidence following the return of Labor's Kevin Rudd to the Prime Minister's job, rising 1.9 points to 114.7.
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