Extreme volatility in global financial markets has put a dent in confidence, despite the economy's strongest job gains on record.
The weekly ANZ-Roy Morgan consumer confidence gauge dropped 2.9 per cent with the sub-index on sentiment towards current economic conditions tumbling six per cent from a seven-year high.
Confidence is a pointer to future household spending.
Commonwealth Securities economist Ryan Felsman said market turbulence has unnerved consumers with global shares posting the worst weekly returns in more than two years as investors fretted about rising inflation and interest rates in the US.
However, he said the Australian economy is still in good shape despite this recent market volatility.
This was borne out in the latest National Australia Bank business survey for January showing strong conditions and confidence among firms at the highest level since April 2017.
Prime Minister Malcolm Turnbull, noting the latest survey, said confidence is "absolutely critical".
"It drives investment and investment leads to more jobs," he told parliament.
Treasurer Scott Morrison also used the positive results to again push the case for the government's business tax cuts, which are opposed by Labor, the Greens and smaller crossbench parties in the Senate.
"If you make business, through higher taxes, pay more money to the government, it makes them harder to pay higher wages to Australian workers," Mr Morrison warned in parliamentary question time.
NAB group chief economist Alan Oster said businesses have been buoyed by the improved global economic backdrop but also emphasised the latest survey was conducted before the slump in world shares.
He said the survey's employment index remains consistent with a solid rate of job creation of around 20,000 per month, which should be enough to put further downward pressure on the unemployment rate in the first six months of this year.
Reserve Bank assistant governor Luci Ellis reiterated the central bank's view it expects wage growth to pick up eventually, telling an economists' conference in Sydney business conditions are looking more positive, employment growth has been rapid, and short-term indicators of future hiring have picked up further.
"There are some positive signs that make us a bit more confident that the expected pick-up in wage growth and inflation will eventuate," she said.
Mr Oster expects the Reserve Bank will be in a position to lift the cash rate in the second half of the year if unemployment falls further and wages show improvement.
Although he also noted the central bank has indicated it is in no rush to lift rates.