News in Charts: Hits and misses in 2021

At the beginning of every year, Fathom reflects on its major macro calls from the previous twelve months. What did we get right in 2021? What did we get wrong, and can we learn from that? And what should we be looking out for in 2022? Let’s start with the five good calls made by Fathom in 2021.

We got the trajectory of the recession right before the consensus and stuck to it while others flip-flopped, forecasting a V-shaped global recovery from March 2020, and then correctly suggesting by March 2021 that the pre-COVID trend for global GDP would almost be restored by the end of the year. We later added the caveat that a reduction in labour market participation, facilitated in part by generous fiscal support packages, may prevent a full return to trend in some major economies — as is proving to be the case.

We got it broadly right on inflation too, diagnosing the impact of the recession as net inflationary as early as March 2020 when we called the V, suggesting that a slower recovery of the supply side of the economy would probably lead to higher inflation. In March 2021, we gave it around a 1-in-3 chance that inflation would move above 5% in the major economies. In June, with a sustained rotation in household consumption out of services into goods putting further upward pressure on prices, it became our central case.

Refresh this chart in your browser | Edit the chart in Datastream

Meanwhile, we correctly forecasted that the Chinese authorities would not take advantage of the economic tailwinds of their strong, early recovery from the pandemic recession to rebalance their economy. China entered the pandemic recession first among the major economies and exited first, growing extremely rapidly in the second half of 2020. The easily achievable growth target for 2021 presented the ideal opportunity to shift the balance of its growth towards the consumer – but the opportunity was not taken, as downside risks to growth arising from rebalancing were judged to be too great. The consequence could be longer-term underperformance.

On the geopolitical side, we accurately suggested that US-Sino relations would not revert to their pre-Trump status with the election of Biden. Our view was that there had been a sea-change in the stance of the US towards China ahead of the election of President Trump, on both sides of the political divide. In fact, if anything, the relationship has become more antagonistic.

Refresh this chart in your browser | Edit the chart in Datastream

Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in Refinitiv Eikon.

In terms of markets, we argued that they would be risk-on throughout 2021 amid the rapid recovery and unprecedented policy support. We recommended oil and other commodities as likely outperformers, rightly as it turned out, and actually underestimated the strength of some equity markets, especially the S&P500.

So much for the good calls; how about the bad ones? We thought that a sizeable portion of the excess savings that built up in the developed economies during the pandemic would have been spent by now. While household savings rates have returned to normal levels, they have not dropped below – a necessary condition if the accumulated savings were to be spent. Most of the excess savings are held in liquid form, in bank accounts. The motive for saving was perhaps more precautionary than we had assumed. Had more of the savings been spent, we could have seen a ’super-V’ in global growth.

Refresh this chart in your browser | Edit the chart in Datastream

We assumed the creation and distribution of highly effective vaccines would prevent further lockdowns. This has been the case so far in the UK, and in most of the US. But other countries have introduced renewed national lockdowns in response to both the Delta and Omicron variants.

We reasoned that inflation would probably decline after the initial spike. Our central case through 2021 called for higher inflation to be transitory, and it still does, though the definition of transitory has shifted somewhat. But we should not let ourselves off the hook by shifting the goalposts: coming into last year, we thought the inflation rate would be falling by now, but instead it continues to increase. We should learn from this mistake: the risks of transitory and persistent inflation are now finely balanced.

We said higher inflation would be met with higher yields. By June last year, we saw a greater than-evens chance that the yield on ten-year US Treasuries would move above 2.5% by the end of 2021. In fact, it closed at a whisker above 1.5%. Central banks continue to assume, or perhaps to hope, that their hard-won credibility will do much of the work when it comes to getting inflation under control. Investors continue to believe them, for now, which is why expectations even of the short-term policy rate have risen by less than expectations of near-term inflation. But investors remain jittery amid significant uncertainty about the outlook for monetary policy, globally.

We thought that investors would fret much more about tighter money, and sooner. At the beginning of last year, our central case for US equities saw them levelling off through the second half of 2021. In fact, they soared. Nevertheless, fretting about tighter money is very much in vogue as we move through January, so we may just have got the timing wrong.

So much for 2021. What should we look out for in 2022? The risk of persistently higher inflation is perhaps the key theme for the year. Inflation will probably create the kind of volatility in the yield curve that has been absent for many years, with corresponding effects in other asset markets. And it might lead to higher rates at all maturities, once the Omicron phase is over. Other themes include potential geopolitical flashpoints in Ukraine and Taiwan.