Confusion over the state of Australia’s economy has reigned since December, and a new report by ME Bank has thrown yet another spanner in the works, albeit a more cheerful one.

According to the bank’s Household Financial Comfort Report, household ‘comfort levels’ are at their highest since October 2011, rising eight per cent in the past six months.

• Inflation hits two-year low
• Will the Reserve Bank cut the cash rate?

Increased job availability, higher levels of job security and the failure of the harsher federal budget measures to get through parliament all contributed to a better result.

Gen Y were particularly upbeat, with 65 per cent feeling it would be easy to find another job within two months if unemployed, and an extra 30 per cent feeling they are prepared to deal with a financial emergency.

Are you walking blindly off a cliff? Photo: Shutterstock

Mixed messages

Strangely, this good news comes at the end of a fairly dismal six months. During that time the price of Australia’s main exports – iron ore and coal – has plummeted, while gross domestic product has dropped dramatically, and business confidence has reached a 23-year low – none of which, you would think, is conducive to high levels of household confidence.

On the upside, however, it looks like the unemployment rate may be on its way down, although there is no certainty that this is a longer-term trend.

So are Australian households right to feel so comfortable? Or have we got our heads buried in the sand?

The budget

According to the report’s co-author, ME Bank consulting economist Jeff Oughton, a major reason for improved household sentiment is the failure of the Abbott government to get some of its harsher budget measures through the Senate.

“Households were concerned about polices like the GP payment and the fuel tax. A lot of the budget measures have been blocked, and the government has watered down others,” he says.

Another major factor, Mr Oughton says, was improved employment prospects, with job availability – measured by the number of job ads – jumping 22 per cent.

“What you’ve seen in the labour market is that job availability has been rising for the last seven months. It’s up nearly 11 per cent on a year ago.”

In particular, he says the self-employed have seen a big boost to their financial comfort.

“They’re saying there is more work about for them. They’re also less concerned about what’s happening around federal policy.”

Cutting the cash rate – good or bad for households?

The failure of harsh budget measures to pass the Senate boosted household sentiment.

ME Bank’s report came out the day before the Reserve Bank was due to make its first cash rate decision of 2015. If the RBA cuts the rate, as the market is predicting it will, how will that affect household sentiment?

Mr Oughton says income and accumulated wealth are the most important thing to households, with interest rates a distant third. And even then, households are divided.

“I used to work in the central bank,” he says. “And the governor used to say he got more letters from people complaining about low interest rates than complaining about high interest rates, because of the savers. The household sector is a net saver.”

While low interest rates are great for borrowers, for savers they mean much lower interest rates on savings accounts and term deposits. So while a cash rate cut may encourage more spending and less saving (which economists say is good for the economy) it doesn’t mean households will be happy about it.

So should the RBA cut the cash rate?

“The Australian economy is still stuck in third gear,” says Mr Oughton. “The world’s got shakier and our commodity prices have fallen dramatically.”

He also says the Australian dollar has been “stubbornly high”.

“Cutting interest rates is probably their [the RBA’s] bias, but I wouldn’t be surprised if they wait and see. It depends how bearish about the world they are.”

The Reserve Bank will announce its rate decision on Tuesday afternoon.