A year of upsetting everyone

Daily update

2025 is the best of times, and the worst of times; an epoch of belief, an epoch of incredulity. In an increasingly polarized world, people will cling to one side or the other—without recognizing that both sides can have a point. It is an economist’s role to impartially assess the economic consequences of politics, in clear and direct language. The likely result is that I will upset everyone this year.
2025 starts with developed economy consumers in a solid position—balance sheets are OK and real incomes are rising. Developed economy consumers dominate the global economy, and this suggests benign growth. The risk is political uncertainty.
US President-elect Trump’s stated aim of aggressively taxing US consumers via tariffs is an example. Markets are not pricing in the inflation and growth consequences of policy pledges becoming reality, and assume dilution. The shift in immigration policy from Trump’s advisor Musk can be cited as a parallel—economic reality tempering political rhetoric.
Investors’ assumption that economic reality will limit political extremes is evident elsewhere— China and Germany, for example. As polarization reduces the middle ground, it is inevitable that markets have to pick a side rather than a compromise. But if markets pick the wrong side, the economic fallout will be more dramatic.