A few analysts are calling for the RBA to cut the cash rate next year to fend off the impact of weaker housing on the economy. Our view remains that it is far more likely that the RBA will start hiking the cash rate next year as a rebound in home buying activity later in 2019 adds momentum to an economy growing close to potential. The risk in our view is that a revival in housing will push growth above potential and will prime inflation.

A key assumption underpinning our RBA rate hike view in 2020 is that the global economic growth will be stronger in 2019 than most analysts including the IMF and OECD are currently predicting. The gloomier forecasts of many analysts are based on a view that that the long period of improving global economic growth is approaching advanced old age and will be euthanized by the combined negative impact of tighter monetary conditions and restrictions on international trade.

Our view is that 2019 is shaping up as a year where most central banks, including the US Fed, take a leaf out of the RBA’s monetary policy playbook and do nothing for the year. There may be small tweaks around doing nothing. The US Fed may continue to slowly reduce the size of its balance sheet and the ECB is moving from quantitative easing (buying bonds on a monthly basis) to holding its balance sheet steady – a sort of quantitative neutral position. The Peoples’ Bank of China, in contrast may continue to ease monetary conditions as it has already started to do.

All told, the ocean of liquidity created by the central banks in response to the global financial crisis and that has in large part allowed the global economic recovery to survive to advanced old age looks like staying close to full through 2019, rather than draining. Ample central bank liquidity also makes it unlikely that interest rates will push up further than they have during 2018. Indeed, we expect that most longer-term interest rate will be lower on average through 2019 than they were through 2018 as the world’s central banks take a pause.

Another crucial factor allowing central banks to pause through 2019 is a noticeable, but also temporary we believe, easing in the upward pressure on inflation. Lower energy prices have played a role in reducing inflation pressure. Producer prices in the US, Europe and China are all showing slower annual growth than was the case in mid-2018 – much slower in the case of China down from over 4% y-o-y to only 0.9% y-o-y currently.

It is true that labour markets are still very tight in several economies including the US, Germany, Japan and even Australia. If GDP growth continues to run above trend wage pressures will build up eventually and push up inflation. It is just that these wage pressures do not look like building to the point of igniting inflation pressure for perhaps another year or so.

The other big potential inhibitor of global growth – the US-led trade war seems to be moving quickly from an intractable problem to a deal is approaching. The signs have continued to build over this past week that the US and China is coming close to a workable bi-lateral trade arrangement that could allow an early removal of the tariffs imposed on imports of goods in to the US from China.

Whether it is the trade war and/ or tighter monetary conditions led by the US Fed, the common theme in the more pessimistic forecasts of 2019 global economic growth is that one or both factors do not change for the better and will cut down economic growth. In contrast, we see evidence that both factors are improving and will release their negative grip in 2019 allowing the underlying strength in in the global and Australian economies to come to the fore.

Turning to Australia, outside of housing most other parts of the economy are showing signs of performing strongly or very strongly. The most obvious evidence of this underlying economic strength are job vacancies at a record high level (over 250,000) and the month-to-month big increases in the number of people in employment.

Those analysts looking for Australian growth to weaken to the point of needing a cash rate cut in 2020 foresee both a weak global growth outlook (something we dispute as shown earlier) combined with prolonged and worsening downturn in Australian housing causing households to become much less willing to spend.

Our view is that the Australian housing market although still weak in the near-term is likely to improve later in 2019 or early in 2020. The biggest factor causing the downturn in housing was the imposition of tighter credit conditions for home loans, especially investment home loans. Those tighter credit conditions were initially prompted by banking regulators and reinforced during the revelation of poor lending practices uncovered by the Hayne Bank Royal Commission.

The banking regulators have more recently eased back on some of the controls applying to bank lending for housing. The Hayne Royal Commission will produce its final report in March, but it is fair to say that the banks have pre-empted the likely findings and recommendations and have changed many of their practices. It is highly unlikely that banking credit requirements relating to home loans will tighten further. More likely conditions may ease a little, especially as banks have come under much more intense competition from non-banks for home loan business. Indeed, non-banks have lifted home lending to a point that it is starting to more than offset the weakness in home lending by banks.

Even before the Christmas/ New Year break in the housing market there were signs of bargain hunting in parts of the Melbourne and Sydney housing markets at the epicenter of the housing downturn. First-time homebuyers are taking up a bigger proportion of new home loan commitments.

There is still an excess supply of new homes coming on to the market relative to population growth needs, but the latest fall in home building approvals suggests the imbalance is quickly shifting from too many new homes to too few.

In a stable, or lower, home loan interest rate environment and with most people in secure employment it is increasingly likely that housing will base and recover. Add better housing prospects to improving global and Australian economic growth prospects and it is only a matter of time before the RBA will need to consider hiking the cash rate. The good news is that low inflation in the near term means there is little pressure to hike this year.