January 4, 2019

News in Charts: Fathom’s 2018 scorecard

by Fathom Consulting.

2018 was a great year — 2019 should be even better. How did Fathom do in terms of predictions for 2018? Here is a summary of our best and worst calls.

Fathom’s best calls of 2018

In the first quarter, we called for heightened volatility in equity markets — a call that came through in spades. Equity volatility will remain high through 2019 too.

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We correctly predicted four fed hikes throughout 2018, a strongly out-of-consensus call. We expect two or three further hikes during 2019 — which is strongly out-of-consensus again, with markets judging a cut to be more likely than a hike, according to Bloomberg.

We expected that the US would be alone among developed economies in hiking rates materially, so that both policy rates and long bond yields would decouple between the US and the rest of the developed world. This has also transpired. We expect further decoupling during 2019.

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We expected sterling to slip back against the dollar as Brexit uncertainty, compounding the underlying weakness of the UK economy, pulled it down, which it duly did. Our forecast sees cable broadly unchanged through 2019 (with pronounced risks in both directions, depending on what happens after 29 March).

We called for a global recession in 2020, at a time (2018 Q2) when that was a strongly out-of-consensus call. The consensus has since moved towards the Fathom view.

We called for core inflation to rise in the US, in both wages and prices. We expect further increases through 2019.

We expected the renminbi to depreciate against the dollar in response to the threat of tariffs, to reach almost 7 by year-end. We expect further reminbi depreciation, though at a slower rate, through 2019.

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We argued that large caps would outperform small caps in the US and the UK large. That relative position paid off, particularly in the US, and we are now taking profits.

Fathom saw the UK flirting with recession early 2018. A recession was avoided in the end, but growth in the first quarter of 2018 was substantially weaker than the consensus or the Bank of England expected. Our forecast for 2019 is for growth of only 0.5% in the UK — with about an evens chance of a technical recession.

We expected the new Italian government to promise fiscal expansion, which it soon did. But the promise is empty, as another early election beckons.

We argued that China would abandon its growth strategy (rebalancing and innovation) and revert to the old model, which it later did. Growth is holding up, but it is focused on investment in infrastructure, not on consumers and high-tech sectors.

Fathom’s worst calls of 2018

We thought we would be alone in calling for a global recession in 2020 but in fact the consensus has moved into line with our view (about six months later). Because of that, the risk of recession has now fallen – if everyone can see it coming, it is less likely to come.

We over-predicted core inflation in many countries, and particularly in the euro area.

We over-predicted GDP growth and equity returns in the euro area too – part of which was down to weaker-than-expected net trade.

We under-predicted growth in China – having made the right call about the composition of growth.

We under-predicted growth in the UK, thanks to the weather and the propensity for UK consumers always to borrow more. We remain bearish about the prospects for growth both in China and in the UK, but with less conviction than a year ago.

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