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.
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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