Martin Wolf on the economy in 2026

0:02Martin Wolf: Hey there, listeners. I hope you all had a relaxing and restful holiday season. For our first show of 2026, I'm excited to share that we have my colleague Martin Wolf back on. He's the FT's chief economics commentator, and he's joining me on the show to help me and you understand what to expect in 2026. To do that, we're going to talk about some of the biggest economic stories of 2025 and what Martin expects to see in the coming year in areas ranging from AI to trade policy. I should say Martin and I had this conversation before U.S. forces captured Venezuelan leader Nicolas Maduro, an event that we'll be covering closely here at the FT.

0:50Martin Wolf: I'm Mikayla Tendera, and this is Behind the Money.

1:12Hi, Martin.

1:13Martin Wolf: Welcome back to the show.

1:14Michela Tindera: It's a pleasure to be with you.

1:16Martin Wolf: Glad to have you. Let's start off with possibly the topic of 2025, artificial intelligence. It's been the all-encompassing story of the past, you know, say, 24 months, if not more. All of the excitement and hype around AI has been driving up the stock market, and it's led lots of people to ask the question, are we in a bubble? Martin, where are these fears that a bubble has formed coming from?

1:45Michela Tindera: Well, I suppose, as usual, they come from what have been extraordinary rises in the values of a relatively limited number of mega stocks, led, I suppose, by NVIDIA, which have increased in value just enormously. I believe it is now the world's first$5 trillion company. So the question then is, is that supported by the genuine prospects of the businesses, or is it mostly hype? And that's an absolute standard question when there are enormous changes in valuations based on hopes for the future, which haven't yet been realized. That unfortunately is something we've seen many times in the past, starting with the railroads in the 19th century, the dot-com bubble is another famous example, that the expectations of profits from new technologies, which are themselves genuinely exciting.

2:44Michela Tindera: There's no doubt the railroads were real and the internet was real. Both changed the world. But in this case, again, the question is, will there be the profits that everybody hopes for, particularly given that the investment is so huge?

3:00Martin Wolf: It's amazing to think about how quickly this all has happened. I actually was looking back the last time we had you on Behind the Money to talk about expectations for the coming year was at the end of 2022, looking ahead to 2023, there was no mention of artificial intelligence in our conversation whatsoever, actually, which is kind of amazing to think about. But I'm curious, do you think these fears that we've started to hear about in 2025 about an AI bubble forming, do you think that those could become more tangible or apparent in 2026? Or do you think markets will continue to shrug off these concerns?

3:41Michela Tindera: This is where the big question arise. If it turns out that the profit hopes are not realized, because there isn't actually a really profitable business model here, then at some point the markets will realize this. So the first question, is that true? I think those stories are likely. And the second question is, when will markets realize? I'm not at all convinced that they will realize this year. The hype is very strong. The spending will go on. They might continue not to make profits for another year or two or even three, while people still hope for the rainbow at the end of this. It is possible that it will burst in 26, but I think it's impossible to predict where market corrections, which I do expect, will occur.

4:27Michela Tindera: It could be this year, next year, far into the future. There's a very famous remark by a now-dead distinguished economist at MIT who said generally that bubbles continue for much longer than you imagine. And then when they correct, they correct much faster than you can imagine.

4:58Martin Wolf: Another huge story of 2025 was trade and trade policy. Now, Liberation Day and the so-called reciprocal tariffs might sound like something from a distant dream or something to some listeners. But U.S. President Donald Trump's massive tariff announcements sent markets on a wild ride in 2025. Things didn't end up being quite as serious as Trump initially proposed. But Martin, how would you describe where global trade policy ended up by the end of 2025?

5:35Michela Tindera: So the answer to that is, broadly speaking, that U.S. tariffs are much higher than they were at the start of 2025. On average, they're sort of back to where they were about at the time of the end of the Second World War. So that was a big jump. Now, the way Donald Trump has set up his trade policy, this is pretty well unheard of. This is a completely new trade policy world. Nothing like this has ever happened before. It's not just a rejection of the trade system of almost the last 100 years. It's a rejection of every trade system there's been, because this is not how countries normally conduct trade policy, because to be very bluntly, it's nuts because it creates so much uncertainty and so much unpredictability.

6:26Michela Tindera: The average level of protection in the US is much, much higher than it was at any time since shortly after World War II. But the variance among tariffs across countries and products has reached extreme levels. And that creates a great many further consequences in the system, in policy, and for the economies. And how that will play out over the next few years is one of the more complex questions in predicting trade policy.

6:57Martin Wolf: Well, now I need to ask you exactly that. Looking ahead to the rest of this year, 2026, what are you expecting to see happen with trade policy?

7:07Michela Tindera: Well, my guess is that we're now going to see protection spreading to other parts of the world. And the EU is most likely to go somewhat more protectionist in 2026. I mean, basically, the story here is the U.S. has raised tariffs against China. direct exports from China to the US will decline. And a lot of that is going to go to Europe. And I'm quite confident that Europe and other importing countries, which have industries they want to protect, will raise protection against China. And then the question is, how will China react? It will probably put up tariffs against the countries protecting against it.

7:53Michela Tindera: And that will probably lead to further rounds of protection across the great trading powers. So we've entered in what I've called basically a situation of anarchy, and the anarchy is novel. It hasn't been like this before.

8:11Martin Wolf: Do you think that this anarchy that you're referring to is something that markets are expecting at this point, or will this come as a great shock.

8:21Michela Tindera: I think anybody looking at world trade and the world economy has to assume that is going to happen. What is much more difficult is to work out the extent and how the trading system will respond because it can be very complicated. For example, more Chinese exports might go via Vietnam, for example. Will Europe react against that too? And if so, how and how far in this complicated game of trade diversion, as economists call it. There's a lot here that we don't know. I expect, however, no huge change in protection against services. That's very different and you can't use tariffs of any kind against services.

9:07Michela Tindera: So it's going to be focused on goods and mostly manufacturers.

9:39Martin Wolf: Thank you.

9:47Martin Wolf: We saw the Trump administration make a number of deregulation pushes in the financial sector. What were the biggest changes that you observed?

9:56Michela Tindera: As far as I can see, these fall into two main areas. The first is deregulation of the banks, the core financial institutions, both larger and smaller, particularly lowering capital requirements. So increasing the extent to which they can leverage up with debt, which is one of the things the post-financial crisis regulation was designed to prevent, but that's the first thing. And the second is to reduce the intensity of surveillance of these institutions through so-called stress tests. And as I understand it, really reducing very substantially the number of inspectors in the Federal Reserve and other institutions of that kind who are just monitoring what's going on in these banks.

10:45Michela Tindera: So obviously the aim is to get the banks to take more risk. My view tends to be this is pro-cyclical. They're already taking a lot of risk, so it increases the amount of risk in the system.

10:56Martin Wolf: Okay. So area number one when it comes to deregulatory pushes are the banks lowering their capital requirements, but also changing the way banks' stress tests are handled. So what's the other area?

11:10Michela Tindera: The other area I've been very struck by is the deregulation of crypto finance and more broadly deregulation of and growth of non-bank financial intermediation with private equity businesses basically operating like banks. Again, in these areas, deregulation or the lack of regulation has already gone very, very far. To me, when I look particularly at the crypto area, this looks to me quite Wild West-ish. And I wouldn't be surprised if something went wrong fairly soon. And obviously, there's this really very free environment in which non-bank financial intermediaries work in the US. And there are some very complicated interactions between these sectors now, which it's impossible for an outsider to identify, just as so many of the things that blew up the financial system in 2008 -9 were basically invisible to the outside eye.

12:13Michela Tindera: And that's what worries me.

12:14Martin Wolf: Something that we've discussed on the show quite a bit is looking into the private credit space. And one recurring phrase that comes up a lot from reporters that we've had on the show is people are looking for the so-called cracks in the system that might be forming. I mean, are there any things that we can watch for or is it all a black box?

12:37Michela Tindera: Well, that's a very good question. Often it's very difficult, unless one is involved in this full time, and I'm certainly not, to identify where these cracks will appear. Because the interactions among players, particularly with people trying to insure themselves against certain sorts of risks, and they insure themselves with a completely new set of intermediaries about which we might not know very much.

13:04Martin Wolf: Right. And you're talking about in this space groups working with the non-bank entities, doing things like providing insurance to them.

13:12Michela Tindera: Yes, I've been permanently scarred by the failure to understand how big a role the AIG operation in London was going to behave in the 2008 crisis. And the reason is because a lot of risk was parked there outside the banking sector, but it was insuring them against risks that they'd imported. AIG was, of course, a AAA-rated insurer. It created a subsidiary in London, which used the AAA-rated balance sheet to justify insuring some of the riskier derivatives in the system at that time. And these were derivatives on which people relied for insurance if prices started moving against them in a big way and if losses became correspondingly very large.

14:18Martin Wolf: And just a quick refresher for our listeners, as this was almost 20 years ago now, but AIG, American International Group, in the financial crisis, the firm ended up not being able to back up those insurance commitments that they'd made.

14:32Michela Tindera: And that led effectively to the bankruptcy of this operation. It needed to be bailed out. And that was an important leg in the crisis in terms of requiring large-scale bailouts of institutions that thought they were insured but actually weren't. Now, I don't know whether there's a player or players doing that. I have no idea. But it's an example of the sort of thing, very detailed, which you can easily miss unless you're really expert about every player in the system. And it turned out now, nearly 20 years ago, that lots of people in the game didn't understand the risks that were unfolding.

15:15Martin Wolf: Yeah. Maybe we can hope that people have learned that lesson by now.

15:19Michela Tindera: Well, I'd be surprised myself, particularly given that the regulators are taking their eyes off it. Right. Don't forget, it's quite rational often for players to take these risks. They can make huge amounts of money for a very long time. And they can always hope that by the time this house of cards collapses, if it does, they'll be somewhere else.

15:46Martin Wolf: Later this year, there's going to be a new head of the Federal Reserve in the U.S. How do you think that that will impact monetary policy?

15:54Michela Tindera: Part of the answer to that is, will what they want to do for the economy coincide with what Trump wants? For example, it might well be that inflation turns out to fall rather sharply. and in that case, it will be perfectly sensible for anybody to lower interest rates. Donald Trump will be pleased by that and there won't be much of a problem. But let's suppose over the next year, two, whatever, inflation turns out to be much more robust than hoped. Indeed, the recent cut might turn out to be being too much. And the new Fed chair is sort of strongly advised by his staff and other members of the board to raise rates.

16:37Michela Tindera: Well, Mr. Trump, by all historical records of his dealings with this, will scream about that. And then the question is, how will they behave? I can't predict. And at this stage, I'm not clear that inflation will get worse. But of course, there can be shocks. We've seen this in the past. Nobody forecasts the pandemic or anything that that would do. So there could be events like the AI bubble bursting and the investment coming to a shuddering halt, which actually start tipping the economy into recession. And if that were to happen, then they might have to cut rates quite rightly, very quickly. And I feel that at this stage, my view is I at least am very uncertain about the risks around the central forecasts which people are giving.

17:25Michela Tindera: How extreme are they really and which direction are they likely to go?

17:42Martin Wolf: Martin, last time we had you on the show, you told me you were not necessarily a fan of making predictions. But I'll ask you a small one here. Are you feeling optimistic or pessimistic for 2026?

17:58Michela Tindera: Well, I find making predictions more difficult now than ever because the person in the White House is so unpredictable and the U.S. is so important. Let us put it this way. I'm more concerned about the politics than I am about the economics. We are in a very new political era. And it's possible, as we've seen, that we can have lots of political turmoil. But the economy sort of keeps going. And when I look at the world economy now, barring some very big disaster, obviously a huge collapse of the U.S. stock market because of AI, a war that I haven't foreseen, an enormous increase in protection against China and retaliation, or a huge upsurge in inflation, none of which seems to me likely, I feel the economy should be able to chug along without disaster.

18:53Martin Wolf: Do you have any wildcard predictions for us in 2026?

19:00Michela Tindera: Oh, that's a really nice question. Well, the most obvious wildcard would be some, you mentioned wonderfully the fact that a few years ago we hadn't heard of AI. Well, maybe somebody's going to come out and say, there's this great new technology which is going to completely transform whatever it is. That's certainly not something I can predict. But really big innovations can be extraordinarily effective in transforming the world. And they can happen very, very subtly, as you've suggested. We tend to assume we're in the middle of one, and so we're not going to get to another one. But there's no logic in that.

19:40Michela Tindera: There could be one after another. AI might suddenly prove to be vastly more effective than even than we suppose. I was very shocked at the way the Chinese company DeepSeek managed to replicate much of the American success of vastly less resources. Something really big might yet come out of that.

20:00Martin Wolf: Yes. I was thinking of the DeepSeek example just as you were speaking about the potential technology.

20:06Michela Tindera: That was an extraordinary example. It was such a shock. And the Chinese might have more like that. I mean, they are pouring immense amount of resources and, of course, gigantic quantities of manpower into progress in the areas that they've selected. And this is one of them. And if I've learned anything in the last 20 years is don't underestimate the Chinese when they seriously want to do something. And so I wouldn't rule out something quite startling coming from there. I suppose another wild card is that the American administration, for reasons I will never fathom, decides to close down some other area of scientific research beyond the ones they're already attacking in medicine, vaccines, clean energy, and so forth.

20:55Michela Tindera: Now, that could be very exciting. If the U.S. withdraws more and more of its efforts from the frontiers of science, that will change the world unambiculously for the worse. But those have been some of the really big shocks of the last year. But back in January, I never imagined that this was possible.

21:12Martin Wolf: Well, Martin, thank you for coming on the show.

21:14Michela Tindera: It was a great pleasure.

21:21Martin Wolf: Behind the Money is hosted by me, Michaela Tendera. This episode was produced by me and Safiya Ethmed. Fact-checking by Simon Greaves. Sound design and mixing by Sam Giavinko. Original music is by Hannes Brown. Topher Forges is the FT's acting co-head of audio. Thanks for listening. See you next week.

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