Australian consumer confidence tumbled last week, a disappointing outcome after surging to a fresh three-year high in mid-August.

The ANZ-Roy Morgan consumer confidence index slid 2.8% to 118.4, largely reversing the surge seen one week earlier. Despite the disappointing result, the index remains well above its long-run average of 118.4.

According to ANZ, the decline was entirely driven by weaker sentiment towards the economic outlook.

“After a strong bounce in the previous week — which brought both indices above their long-run averages for the first time since 2013 — households’ views of the 12 month economic outlook fell a sharp 7.0%, while views of the five year economic outlook dropped 7.5%,” said the bank.

The federal government has been warning of the importance of its economic reforms being passed over the past week. Treasurer Scott Morrison delivered a keynote speech in which he warned he did not want the hard questions to be tackled only when the economy really turns down.

However, while volatile, ANZ notes that both remain close to their long-run averages.

Helping to offset concerns surrounding the economy, perceptions on consumer finances continued to improve, a good sign, says ANZ, for the outlook for household spending.

“Consumers’ views of their current finances rose 1.9%, while views of future finances ticked up 0.4%,” it said.

“Importantly, the four-week moving average of the index of current finances is now standing at a post-GFC high. This is particularly encouraging as this index is the one most closely correlated with consumer spending.”

The chart below from ANZ shows the relationship between current personal finances and household consumption expenditure found in Australian GDP.

The final component of the survey — whether now was a good time to buy a major household item — slid by 2%, although it too remains at elevated levels.

Felicity Emmett, head of Australian economic at ANZ, suggests that once you look through the week-to-week volatility in the index, the trend in confidence is clearly higher, noting that the four-week moving average currently sits at the highest level seen since late 2013.

Looking ahead, she believes that upcoming economic data will reveal whether the recent improvement in the surveys finance measures has translated to an increase in household spending.

“This week’s retail sales numbers and next week’s consumer spending data will give us an idea as to whether the recent improvement has translated into stronger spending,” says Emmett.

That’s the important question. When the rubber hits the road, has the boost in confidence translated into an increase in spending. History says it’s likely, but we’ve come to expect the unexpected in the post-GFC world.

We’ll find out soon enough.

July’s retail sales report will be released on September 1 while Australian Q2 GDP, including the largest component within it — household consumption expenditure — following on Wednesday, September 7.

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