The RBA’s decision to drop the cash rate in February has buoyed business confidence in the past month, but Roy Morgan Research warns the sector still faces serious economic “head winds”.

According to figures from Roy Morgan, confidence is up 6 per cent from last month, and the majority of businesses believe the next year is a good time to expand.

Confidence still remains “fragile” however, and is below both pre-federal election levels and the average for the last four years.

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Roy Morgan Research industry communications director Norman Morris said a number of factors were at play, including uncertainty surrounding the upcoming federal budget.

The falling Australian dollar will have a mixed impact on the economy.

“This increase in business confidence is potentially good news for the Australian economy but whether it is sustained over coming months remains to be seen,” Mr Morris said.

“The drop in the official cash rate by the RBA in February may have positively impacted on businesses’ plans to borrow, but this could easily be negated by strong economic head winds.

“And there are plenty of those blowing at the moment: from ongoing publicity about how the dramatic drop in iron ore prices will affect the federal budget and economic mood, to difficulties getting budget measures past the Senate; from political uncertainty and tax reform, to speculation about the forthcoming May budget.”

Mr Morris said other industries had failed to make up for the downturn in the mining sector, which would continue to have a subdued outlook.

He also indicated the recent drop in the Australian dollar would have both negative and positive impacts on the economy, which are yet to be seen.

“Construction has shown a small improvement in confidence, but manufacturing has fallen below average and retail only remains steady.”

Speaking to reporters on Wednesday, Treasurer Joe Hockey admitted the upcoming May budget would have to address falling iron ore prices, which have more than halved in recent years.

“The measures will be very responsible, reasonable, they’ll be fair, but we are trying to do more with less money and that is very difficult to do,” Mr Hockey said.