The National Australia Bank (NAB) monthly business survey's measure of business confidence increased 8 index points to plus-18 points in August.
It was the highest level since October 2003 and "well above long run average levels'', NAB said in the report released today.
"The improvement was very broadly based but especially noticeable in retail, finance, manufacturing and recreational and personal services,'' it added.
Construction and transport were the only sectors to report lower confidence.
NAB said the broad-based rise in business confidence was due to "macro forces'' such as "policy stimulus locally and more signs of stabilising global economies and improving equity markets''.
The jump in confidence was not matched by the survey's measure of actual business conditions, however, which rose three index points to plus-four points in August.
Still, it was the highest level since May last year and "approaching long run average readings''.
Business conditions are determined by respondents' views on trading, profits and employment. The NAB report found that although trading and profits were improving, firms were still shedding jobs and cutting back the working hours of existing staff.
NAB chief economist Alan Oster said the gap between confidence and conditions suggested business may be a little bit too optimistic at this stage of the economic recovery.
"While these outcomes are very encouraging, to some extent we suspect that current confidence levels may be starting to get to unrealistic levels - just as they fell to overly pessimistic levels earlier in the year,'' he said.
"We are increasingly concerned that confidence may be getting substantially ahead of reality.''
The report cited manufacturing as one example where actual business outcomes were in stark contrast to confidence levels among firms in that industry.
"Manufacturing activity while improving still remains among the bleakest, yet its confidence levels are the most optimistic,'' NAB said.
Firms also continued to run down inventories "at a rapid rate'' in August, particularly those in the manufacturing, retail, mining and construction industry.
But the report also found firms "may have reached the end of the de-stocking phase - with a modest intention to rebuild stocks''.
Also, there was little sign of any pickup in capacity utilisation in August and the survey's measure of forward orders fell.
The survey of 550 firms across the non-farm business sector was conducted between August 24 and 28, ahead of the release of stronger-than-expected economic growth figures for the June quarter.
NAB also upgraded its economic forecasts today.
The bank now expects Australian gross domestic product (GDP) to rise 0.5 per cent in calendar 2009, against its previous forecast for a flat outcome.
NAB projects GDP to rise by about 2 per cent in calendar 2010, up from its previous forecast of 1.25 per cent growth. The bank expects a positive GDP outcome for the September quarter of this year, but negative growth in the December quarter.
Unemployment is forecast to peak at 6.7 per cent in late 2010 - a better outcome than its previous estimate of 7.3 per cent.
NAB expects the Reserve Bank of Australia (RBA) to start lifting the official cast interest rates in November, from a current 3 per cent.
"We see the most likely path of policy being three consecutive 25 point increases in November/December/February,'' the report said.
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