Last week we argued that Australia’s economic growth outlook is starting to improve. Our argument was based on prospects for improving international economic growth, notably in the US and China; a cluster of better-than-expected February economic readings in Australia covering home building approvals, international trade and retail sales; and tentative evidence of a bottoming out in the key weak part of the Australian economy, housing.

It is fair to say that our assessment is on the optimistic side compared with most analysts, including the RBA. Our economic view and the view of the RBA, however, are not much different. The RBA is optimistic that the Australian economy is slowly improving, but it recognises puzzling anomalies, especially the softness in recent quarterly household consumption spending numbers and real GDP growth set against businesses that are willingly investing more in plant and machinery and employing more people.

The RBA admits that it needs a lot more information on the state of the global and Australian economies before it can assess with reasonable confidence whether Australian growth and inflation will lift over time or whether the opposite will occur if weakness in housing and consumer spending persist and start to feed a cycle of negative expectations extending to weakness in the labour market.

Most likely the RBA will need to see how GDP growth is panning out in Australia’s key international trading partners, especially in our biggest trading partner China. China’s Q1 GDP report will be released this week and is expected to show only minor slippage in annual growth to 6.3% y-o-y from 6.4% in Q4 2018. Key monthly economic readings for March out on the same day and relating to urban fixed asset investment spending; industrial production; and retail sales. Importantly, all are expected to show a small lift in annual growth responding to moves by the authorities earlier in the year easing monetary policy and lifting budget spending.

If China’s economic reports this week are as expected it will be one step helping to lean the RBA towards optimism about Australia’s economic growth prospects, but it will probably need reinforcement with more indications that China’s growth rate continues to improve in Q2. We expect those signs to show, but the case cannot be proven with confidence until at least China’s Q2 GDP release in mid-July.

In Australia, the economic reports that the RBA will be keen to see before it can develop a clearer view about whether the forces leaning towards economic strength or those leaning towards weakness are winning out include several more months of data relating to the housing market; consumer spending; the labour market; business spending; and consumer spending. The RBA will also be keen to see whether the weakness in real GDP growth in the second half of 2018 continues in the first half of 2019, or takes a turn for the better becoming more consistent with other signs of strength in the economy – strong growth in national income; very low unemployment; strong employment growth; rising business investment spending; strong public sector infrastructure spending; and strong growth in exports.

Our view is that the monthly data reports released so far for January and February have been strong enough on balance to make it very likely that Australia’s Q1 real GDP growth report (due in early June) will be stronger than either of the two weak GDP reports for Q3 and Q4 2018. The RBA may still need more convincing that real GDP growth is improving and will probably want to see the Q2 GDP report as well, due in early September.

It is possible that the RBA may not need the evidence from quarterly GDP reports to refine its economic growth forecasts on the side of deterioration or improvement. If the RBA were to shift its view on- the-basis of monthly reports those reports would need to be stronger or weaker over several months. As mentioned earlier, the monthly reports have been stronger-than-expected on balance, including those relating to housing. They could turn weaker again, but the probability of them turning weaker and staying consistently weaker seems to be lessening.

In contrast, the probability seems to be growing of firmer monthly economic reports on balance. Whatever the outcome of the May Federal election, Australian households can look forward to bigger tax refunds flowing to their accounts from July and the history of big tax rebates is that they are mostly spent. Signs are building that housing demand is starting to improve and the evidence will soon show in rising housing finance commitments (owner-occupier housing finance commitments rose 2% in February and March is likely to be even better based on the increasing number of home sales in the month).

Unless there is clear evidence that the economy is continuing to weaken there is no case for the RBA to consider cutting what is already a very growth-accommodating 1.50% cash rate. Most likely, although the RBA recognises the anomalies between the strong and weak reports of economic activity it is unlikely that it will be able to resolve whether strength or weakness will win out for many months. During that period, it is unlikely to change the cash rate.

Our view, not yet shared by the RBA, is that that real economic growth is showing signs of gathering pace early in 2019. It will still be a long time before better growth threatens higher inflation implying no need for the RBA to change the cash rate until well in to 2020, but that change when it comes is likely to be a rate hike in our view.