Forecasting Profits

Capacity utilisation is the crucial variable in top-down EPS models

Spare Capacity, alias the GDP Output Gap is the central feature of our models for bond, forex and stock markets.

This chart illustrates the way our economic forecasting model works. The level of capacity utilisation in the economy plays a central role in our models for all three types of assets - bonds, forex and shares. This has been calculated for every country analysed and, as the most important example, the chart alongside shows this ratio for the whole world. Our estimate is the thick white line, and for comparison estimates by the IMF are shown as a green line and by the OECD is shown as a yellow line. The scale on the vertical axis represents the number of percentage points by which capacity utilisation diverges from the average over the period.  

There are several advantages for calculating independent estimates for this crucial variable. Firstly our database includes a broader range of countries. Secondly the algorithms are required to generate Best Guesses for financial markets.

The intellectual approach used in our projections may best be described as an elementary application of chaos theory.

As can be seen performance of the three series is broadly similar, despite differences in coverage. The IMF data relates only to the G7 leading economies and the OECD to developed countries only, while the PIT series also includes the emerging markets in our database.

While there are noticeable differences in level in some years, these are of little significance, given the purpose of the P/T series, which is to identify in good time changes in direction that are material to financial markets.

There were only significant divergences in two years, namely 1983 and 1990, in which our projected a change in direction a year earlier.