How polarization is shaping the economy; Trump and energy prices; Earnings winter for EU corporates & taking stock after 29 COPs

The global election super-cycle in 2024 has shown the drift towards more polarization, globally, and the latest Allianz Social Resilience Index 2024 highlights a concerning rise in polarization across 17 EU countries. High noon to underline how critical alliances are to counteract fragmentation. We analyzed which societies are showing signs of stability and social resilience, but more importantly how polarization is shaping the economy, and what needs to be done to actively reduce polarization risks and tap into the power of unity. In our What to Watch publication, we look at the energy price evolution we foresee for the second term of Donald Trump, we evaluated Q3 earnings and investor sentiment, and we take stock of what has been achieved after decades of climate conferences with COP29 in Baku about to end. ICYMI (in case you missed it) – tune in to chief economists from Munich Re, Swiss Re, and Allianz discussing geoeconomic challenges during the GDV Live debate earlier this week (in German).

Little fires everywhere: How polarization is shaping the economy (and what to do about it)

The comprehensive analysis for you here .

In 2024, societies are showing more signs of stability and social resilience, but the frequency and severity of civil unrest is increasing in several countries.?Our proprietary Social Resilience Index (SRI) shows that an improving economic outlook, the absence of systemically disruptive events and lower inflation are contributing to a more resilient social backdrop globally. Yet, the increased frequency of protests and riots in 2024 shows how civil societies are reacting to distinct pressures, and how governments are able to cope with economic trends which erode the social contract. The Middle East saw the most substantial increase (+40.3%), followed by Africa (+19%), where it could still be attributed to the cost-of-living challenges in several countries, such as Kenya, South Africa, and Ethiopia. Asia saw a modest rise of +4.1%, reflecting persistent social and economic issues in countries like India and Indonesia. The US, Canada and Europe experienced a slight increase of +3-4%, reflecting ongoing social and political divisions, migration issues and economic uncertainties. In contrast, Latin America witnessed a decrease of -25.7%, due to the relative slowdown in inflation, improved political consensus and increased security efforts.

In 2025, resilience may not be enough to protect from social instability, particularly in countries where political events are more frequent.?Based on the frequency of protests and riots, as well as key social risk indicators, we identified four clusters of countries: those that are showing signs of normalization (Argentina, Bolivia, Brazil, Chile, and Peru); high-income nations with underlying social issues (e.g. France, Germany, Italy, Spain and the US); emerging economies with fragmented societies (e.g. India, Türkiye, Mexico) and severely strained nations (Nigeria, Syria, Venezuela).

The 2024 super electoral year has revealed fragilities in many countries: all incumbent parties in developed countries lost vote share (a first since WWII), and the ideological center of gravity has shifted to the right in 16 European countries and the US.?Following a year where more than 70 nations – home to nearly half the world’s people – have been called to the polls, making the rising trend of polarization a cause for concern.?The strength of democratic institutions, social cohesion and trust in functioning markets and economies are being affected by increased partisanship. The most recent example is the Republican takeover of the US Presidency, Senate, and House of Representatives. For the first time in 20 years, the Democratic party lost the popular vote, not just the electoral one. The largest shifts towards the ideological right were observed in the last two EU elections in 16 EU countries, including Portugal, Italy, Romania, Bulgaria, Czechia, and Spain. Of course, political polarization extends far beyond the boundaries of the EU (Australia, New Zealand, Japan, the UK, Switzerland, and Canada).

Polarization has increased in many countries. It comes with a sizable economic cost. Using the Dalton Index to measure the spread between political parties by their position in the left-right scale and the size of electorate they appeal to, we find that just seven countries managed to decrease the level of polarization in the last decade. Political affiliation plays an important role in consumer behavior as observed in past events of heightened political uncertainty across democracies. We find that a -10% and -20% one-period consumer confidence shock would decrease consumption by USD105bn (USD304 per capita) and USD215bn (USD622 per capita) over the next four years. In Europe, the same shocks would decrease consumption by USD52bn (USD147 per capita) and USD103bn (USD296 per capita), the effect being more subdued as consumer confidence in the EU still has not fully bounced back from the effects of the pandemic and geopolitical tensions.

The long shadow of inflation, highly debated fiscal adjustment measures (e.g., increased taxation, social protection reforms, climate policies) and lingering productivity growth require policymakers to bridge further the widening trust deficit, actively reduce polarization risks and tap into the power of unity. Corporates may have a role to play too. Research has found that between 1900 and 2020, there were 105 episodes in which countries were able to reduce polarization from pernicious levels for at least five years. In this period, there were twice as many episodes of polarization in democracies, thus proving that countries have a robust capacity to de-polarize. In this context, policymakers and politicians need to refrain from divisive campaigns and make a strong call to unite the electorate – especially as global challenges require a united front and the issues that keep voters awake at night are largely the same: the cost of living, the economy, geopolitical tensions, and climate change. The silver lining is that polarized individuals exhibit a higher willingness to participate in politics across different forms of political engagement. Public resistance to reforms often stems more from concerns about fairness, trust, and misperceptions. To gain support, policymakers should improve communication, engage the public in shaping reforms and address potential harms with tailored support, all of which require tools often found in hyper local architects of change (municipalities or corporates) to build trust through transparent, participatory processes and tap into the power of unity.

The comprehensive analysis for you here .

What to Watch this week

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Drill, baby, drill: What Trump’s second term means for energy prices. On the campaign trail, Donald Trump vowed to reduce fuel prices, but this is unlikely to be achieved via higher domestic production. The US is already the world’s top oil producer, hitting a record-breaking 13mn barrels per day (mbd) in 2023. The administration could also deliver higher LNG supply to global markets by reducing regulatory hurdles and promoting infrastructure development, which could reduce European gas prices (and thus power prices) by over -15%. On the negative side, President Trump could reinstate sanctions against Iran potentially driving up prices by +5-10%. President Trump’s stance on climate policy could also set the US back a few years in the energy transition and hurt global efforts to combat climate change.

Q3 earnings: The Atlantic divide continues. Both S&P 500 and Stoxx 600 companies delivered earnings growth in Q3 2024 (+8.8% y/y) but the revenue recession continued in Europe, with a -1.7% contraction. Overall investor sentiment has improved following the re-election of Donald Trump and the Federal Reserve's second rate cut in November. Small and mid-cap companies, particularly in the US, are well-positioned to benefit from Trump’s reshoring policies, with earnings growth projected at +30-50% over the next two years. But US-centric reshoring policies under Trump and global uncertainty may challenge the recovery prospects for European companies. Looking ahead, earnings and revenue growth will be critical to sustaining market momentum, which has mostly been fuelled by valuation-driven gains in 2024. For 2025, we expect both earnings and returns for US and Eurozone equity markets to rise by +7-12%.

Carbon productivity: Taking stock after 29 climate change conferences. As COP29 in Baku comes to a close, we take stock of what has been achieved after decades of climate conferences. The good news is that the global economy has seen a green productivity gain of 70% cumulatively since 1990, producing USD 3.13 at constant purchasing power parity prices for each kg of greenhouse gas emissions in 2023. And the EU is the clear leader among large economies, with a strong acceleration of carbon productivity from 2.6% to 4.1% annually after the Paris agreement, albeit at seemingly high economic costs. The bad news is that the pace of change is by far not enough to meet net-zero targets by 2050 as carbon productivity mathematically has to go to infinity, which implies much higher growth rates than what we see currently. Transformative breakthroughs across multiple sectors and countries are urgently needed. Without faster progress, the world risks falling short of climate goals, with significant economic and environmental consequences.??

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