A slew of strong earnings from Australian companies in recent days suggest the economy is in better shape than suspected and should help boost consumer and investor confidence in the months ahead, analysts said.
Investors seem to have already given their verdict on the generally stronger-than-expected earnings season, pushing Australia's benchmark stock index to its highest level in four-and-a-half years on Wednesday.
"Earnings are looking good and that tends to suggest the economy is holding up better than people are expecting," said Matthew Circosta, an economist at Moody's Analytics in Sydney.
"And given the strength we have seen in the equity markets over the past six months, that suggests people are seeing Australia as a solid market and this will in turn flow through to the real economy throughout 2013," he added.
The general tone of earnings has been better-than-expected and that bodes well for the economic outlook, even though some market heavyweights have reported weak results. Global miner BHP Billiton, for instance, on Wednesday posted a 43 percent fall in half-year profit, in line with expectations.
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"Earnings season has been good, the market as a whole had too low expectations and things like retail have done generally better-than-expected," Dawson Campbell, director at Elstree Investment Management told CNBC Asia's "Cash Flow" on Tuesday.
"There's been a lot of shorts in there that have been forced to cover (their positions). Banks [earnings] have also done better than thought. We thought banks would be a lot softer and they have done well," he added.
Commonwealth Bank of Australia, the country's biggest mortgage lender which is regarded as a bellwether of Australia's economic health, last week reported a record half-year profit and said it expected domestic business and consumer confidence to improve in line with a more stable global outlook.
Earnings from electronics retailer JB Hi-Fi was another firm, analysts said, which painted a brighter outlook for Australia's economy. The firm beat forecasts with a 3.1 percent rise in first-half profit last Monday, sending its shares up 15 percent.
"We've had surprisingly good results from JB Hi-Fi. The reality is that we've gone through a cyclical downturn in Australia and as consumers come back to the stores, that's good for companies and earnings," said Scott Phillips, investment analyst at Motley Fool Australia.
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Australian Stock Market Performance
According to Circosta at Moody's Analytics, a sustained recovery in confidence could hold the key to improvements in the economic outlook.
Australia's central bank recently trimmed its forecasts for economic growth this year to about 2.5 percent from around 2.7 percent because of an anticipated peak in mining investment, government spending cuts and a strong Australian dollar that has hurt exporters.
To bolster the economy, the Reserve Bank of Australia (RBA) has slashed interest rates 175 basis points since late 2011.
"I've been saying to clients for some time now that Australia has been doing really well but we have a confidence problem and once confidence starts to recover, you will see that pick-up in consumer and investment demand and sectors such as housing and retail should receive a boost," he said.
The RBA's interest rate cuts have helped lift confidence. A consumer sentiment index compiled by Westpac Bank and the Melbourne Institute last week showed a jump of 7.7 percent to 108.3 in February, the strongest reading since December 2010.
Analysts expect the rally in Australian stocks to help boost household wealth and in turn consumer and investor sentiment and then the economy in the months ahead.
Australia's stock market is up about 9.5 percent so far this year, putting its gains on par with those made by blue-chip Japanese stocks, which have been pushed higher by a weak yen and expectations for aggressive monetary easing.
The Australian stock index could rally to around 5,289 in the weeks ahead, according to Stephen Hogan, private client advisor at Novus Capital. That suggests a gain of almost 4 percent from where the market was trading on Wednesday at about 5,100.
And further gains in shares may just help bring about a sustained improvement in confidence.
"All we need for growth to outperform most of our expectations is a rise in confidence" said Circosta. "Consumer confidence jumped in February and if that's sustained in three to six months' time, (growth) forecasts will start to be revised up."
- By CNBC.Com's Dhara Ranasinghe; follow her on Twitter: @DharaCNBC