Businesses and shoppers in Australia are beginning the new year with a surge in confidence, raising hopes that the economy could keep defying the global gloom.

The rosy outlook comes in part from the third straight month of rising consumer confidence, showing that the holiday season shopping bug has carried over into 2002.

The Westpac-Melbourne Institute index was up 3.3% to 112.2 for January, up 10.7% from the year before and marking a 12.7% rise since October.

And businesses too are feeling good about the future, according to consultants Dun Bradstreet, which said sales in the first three months of 2002 are expected to hit a 20-month high.

Rate cut off the cards?

The indicators won a chorus of praise.

"Australia is starting the new calendar year in a far stronger position than it entered 2001," said Dun Bradstreet chief executive in Australia Christine Cullen.

But there were also warnings that the consumer's continuing willingness to spend could torpedo chances of further interest rate cuts.

"Solid consumer confidence - in fact it doesn't get much stronger than this - argues against the need for another rate cut by the Reserve Bank of Australia," said Simon Doyle, senior economist at AMP.

Even indications that the labour market is weakening, that house prices could be under downward pressure and that exports are sliding seem not to be dampening Australians' enthusiasm for spending.

The situation is similar in some respects to that of the UK. Unlike most of Western Europe and the US, the UK is managing to stay on track for modest growth largely thanks to breakneck consumer spending and a rise in personal debt.

Similarly, the strength of the consumer is dampening expectations for further Bank of England rate cuts, despite continuing weakness in the manufacturing sector.