The much-watched Westpac Melbourne-Institute consumer sentiment survey, published on Wednesday, shows confidence dropped this month by a much larger-than-expected 5.7 per cent, to 91.1 points. Anything under 100 points means the number of pessimists outweigh the number of optimists. It means consumers are much less confident about the future than they were a year ago. Confidence is 13.3 per cent lower than this time last year. It hasn't been this low since August 2011. But according to Bill Evans, the chief economist at Westpac who has been running the survey for years, consumers are clearly overreacting to economic conditions.

So the results of the survey are not as bad as they seem. "We haven't seen people as worried about jobs, as unfavourably disposed to the employment story as this, ever, in this survey. That's back to 1975," Mr Evans told Fairfax Media. "That's undoubtedly an overreaction, because we've been through a few recessions in that period, but it is telling us that people are far from happy at the moment." So what are we consumers so concerned about? We're worried about the economic outlook. The week in which the December survey was taken coincided with the release of the September quarter GDP figures, which were weak. That weak growth is not filling them with confidence.

We're also worried about the Australian dollar. The dollar is now trading about US12¢ lower than it was in early September, and as Commonwealth Bank economist Gareth Aird points out, consumers can perceive a fall in the currency as a sign of "economic fragility." In addition, wages growth is weak, and employment growth is very soft. Confusion surrounding the state of the Abbott government's budget and fiscal initiatives is causing plenty of confusion for households too. Wealth perceptions have also been taking a hit, with Australia's stockmarket losing about 5 per cent in value since the last consumer sentiment survey was taken. Mr Evans says these things are serious. They have all given sentiment a jolt and this "should have implications for spending."

But economists can't be sure about the magnitude of those implications. "All the variables that are important, like how consumers feel about housing, how they feel about the labour market, their spending intentions, are all pointing in the one [negative] direction, that's unusual," Mr Evans said. Consumer spending in the September quarter was weak, he said. "So you'd have to start to think that those weak numbers will be sustained for longer than we thought. "That will delay the pick-up in employment and investment," he said.

"The way I think this economy's working at the moment is that businesses are on the sidelines, in terms of their investment and employment decisions. They're waiting to see a sustained lift in consumer spending and this is just going to delay that." The Westpac-Melbourne Institute consumer confidence survey is an important one for Australia's economists. They've long known that consumers are more likely to spend money if they're optimistic about the future and less likely if they're pessimistic. Consumers have been pessimistic for the last ten months now. Economists are looking for a circuit breaker, but it's hard to see where that could come from.

That's why chief economists at some of Australia's biggest banks – including Westpac, NAB, and Deutsche Bank – now think the Reserve Bank will have to cut the cash rate next year from 2.5 per cent. Mr Evans is among them.