"Everything has changed" - Gita Gopinath on the global economy in 2026

[00:00:00] Geeta Gopinath: everything has changed for the global economy it hasn't shown up in the growth numbers for a bunch of reasons that i'm happy to get into but be aware that the world is in a very different place [00:00:12] Speaker 2: welcome to radio davos the podcast from the world economic forum that looks at the biggest challenges and how we might solve them on this episode we're looking at the state of the global economy and what to look out for in 2026. find radio davos wherever you get podcasts spotify apple youtube and all our podcasts are at wef.ch podcast from the world economic forum this is radio davos we're recording this video podcast at the annual meeting 2026 in davos and are joined by one of the world's most distinguished economists she's the former first deputy managing director and chief economist at the international monetary fund and she's now the gregory and ania coffee professor of economics at harvard university geeta gopinath geeta welcome to radio davos pleasure to join you robin so great to have you here you published an article in the financial times a few days ago a few days before um the davos meeting started and i'm going to quote you from it 2025 was a year when everything changed yet somehow nothing did what did you mean so 2025 was a year when [00:01:25] Geeta Gopinath: we saw the us impose one of the highest tariff rates that they've had in over a century now they brought it down from extremely high levels but still the tariff rate was around 14 percent much higher than at the start of the year when it was around three percent you also had a lot of policy chaos a lot of confusion about where the rates would settle and so you would think that that would have been very consequential for the global economy but if you look at global growth global growth for last year was 3.2 percent pretty much exactly what was projected for growth in 2025 the year before when none of this was on the horizon it's like nothing happened and the reason i wrote that piece was to basically make the point that no please be careful don't be fooled everything has changed for the global economy it hasn't shown up in the growth numbers for a bunch of reasons that i'm happy to get into but be aware that the world is in a very different place let's talk about the two things you mentioned then why didn't [00:02:28] Speaker 2: it have that impact i think a lot of economists were expecting to happen and then we'll look at maybe what are these fundamental changes that you say so the first question then is why did it not you know [00:02:39] Geeta Gopinath: bring gdp growth down so there was a time last year when economists thought that this could be highly consequential and even put the u.s economy in a recession that was right after liberation day and the april 2nd tariffs so that three-day window you see you saw markets reacting very strongly it looked like something was going to break but then what did the trump administration do they came and they basically put a pause on those tariffs and said we're opening up time for negotiation with countries so one important reason why things turned out better than it was expected was because the actual tariff rates were much lower than what was originally announced would be the tariff rates and if you look at the true tariff tariffs being paid by firms as they were importing into the us that's even lower than the statutory rate which is around 20 to 23 percent the actual tariff rate in terms of what they pay is 14 percent why is that why is there a description so there are a bunch of reasons for it one there have been a lot of exemptions provided to certain products to certain countries so tariffs have been announced but then they've been withdrawn so the actual tariff rate is very different and also if your goods were on the sea when the tariff was imposed you don't get slapped with the tariff so there were a lot of exemptions and that played an important role now the reason why the economy did better than expected was also that there were two important offsets to the world economy one was ai that was huge there was a large amount of investment in ai stock markets boomed because of that that was good for wealth and that helped hold up consumption at the top end and encourage consumption at the top end of incomes countries that were supplying inputs into the ai boom also did really well exporters like taiwan south korea that growth got a big burst because of ai the second is that fiscal policy and especially in china there was a lot of fiscal stimulus in china germany announced the moving away from the debt break rule and the effect of that is going to play out over the years this year and next year the u.s economy also has a strong fiscal stimulus this particular year in 2026 so all of that is providing support to an economy that's otherwise being pushed [00:04:58] Speaker 2: back by tariffs and so what has fundamentally changed then i think you're saying there is still a risk to the downside for economic growth but are there real fundamental changes that have happened last year [00:05:12] Geeta Gopinath: that are going to hit us this year so the fundamental change that has happened is we've moved away from the rules-based predictable global trade order there is a level of uncertainty that wasn't there before that uncertainty is affecting businesses especially small businesses it takes time for that effect to play out what i'm concerned about is that last year at least there was no overall retaliation from all of the u.s's trading partners china was one country that retaliated europe did not but we're starting this year with threats of retaliation from the european union because of the u.s's statements on greenland now that can amplify but so this world where there's so much uncertainty makes it very hard to make investments and to do business i like to think of what happened after brexit right after brexit there were two years when investment continued to go up and everybody thought well this can't really be such a big deal but then ultimately investment slowed and 10 years later you look back and you say well this was really a negative effect on the uk economy i'm not saying that's the exact effect that would be there on the u.s because the u.s is a much larger economy than the uk but still all of these changes not just in terms of international policy but also domestic policy you know concerns about questions about central bank independence those have slower effects but they do show up over time it is an extraordinary time isn't it [00:06:39] Speaker 2: in terms of just the speed of news breaking that someone like you like economists is going to change potentially their outlook for their various uh economic indicators i mean since you wrote that article in the financial times donald trump's announced more tariffs on europe because of the greenland thing i think that happened between you writing that and then coming here to davos we're recording this for anyone watching or listening on the day before donald trump gives his special address here in davos so who knows what might have happened in the interim i mean just kind of anecdotally you're someone who's been at the forefront of economic analysis for for many many years have you seen a time like this before is this a different scene well you know i was the chief [00:07:25] Geeta Gopinath: economist at the imf when we had the pandemic and that was something that we hadn't seen in a century so that was a major shift and of course we could all we couldn't be in the same room together we had to be working remotely so that was dramatic compared to that this is somewhat less dramatic but still it is a once in a century event with this breakdown of the global order and we may just be at the beginning of all of this happening to your previous question about what is long lasting i think what's long lasting is the complete breakdown of trust between the us and the europe i mean that alliance was a critical part of the global economic order and the fact that that is being ruptured is very [00:08:12] Speaker 2: consequential again maybe by the end of this davos week and next week when this goes out we'll know if things are being smoothed out that relationship or things are getting tough and there's more of a trade war [00:08:24] Geeta Gopinath: we just don't know right now sitting here do we we don't know but i do believe we are never going back to the time when europe said that they could rely completely on partnership with the us on their security and on an economic partnership this is that has changed fundamentally i think europe is looking for strategic autonomy they are figuring out how to rely less on payments that are dominated by us companies more generally how to rely on their own internal economy their own internal security so there's no going back on that regardless of how this week goes let's talk about economic growth in your [00:09:04] Speaker 2: article you said i quote the global economy is more fragile than headline numbers suggest so what are the main risk you've already described the potential kind of delayed impact of of increased tariffs are there others [00:09:19] Geeta Gopinath: so the the sector that did incredibly well last year was artificial intelligence that was a big boost to the global economy i think that's a sector where there is still a lot of fragility when i wrote the article i wrote an article last year in the economist around october where i said that if you had a dot-com like bust it would wipe out 35 trillion dollars of wealth that is many multiples of what happened during the dot-com it's a much bigger share of current world gdp than it was [00:09:49] Speaker 2: during the dot-com so it can be much more consequential how does it compare to that kind of 2008 2009 [00:09:55] Geeta Gopinath: recession so that was a different crisis the 2008 2009 you had also a big financial crisis but that affected banks it was much more deeper it came through the housing sector it was different this comparison is more like the dot-com because it's all about tech and what could happen if you have a tech boom that ultimately doesn't deliver on its promise especially in terms of profitability so i still think we're in a space where the valuations are stretched it is difficult for me to see how in this hyper competitive environment all of these companies could make the kinds of profits that justify their level of valuations that we're seeing now so we could see corrections that's not a statement of the technology i think the technology is going to be great but whether they're all of these companies are going to make the size of profits that justify the valuations i still have questions on that so i think that is a very important risk to keep in mind because financial conditions are actually quite easy everywhere in the world though it keeps changing on a daily basis depending upon news coming in but that is a shoe that did not drop we did not have a financial crisis despite five years of pandemic russia invading ukraine interest rates going up very sharply could we be building up to a financial [00:11:13] Speaker 2: crisis i am concerned about that i bet people ask you every day okay if there's a bubble when is it [00:11:18] Geeta Gopinath: going to burst and how do you answer that yeah there is no formula for predicting exactly when a bubble will burst it could take some time usually there's a trigger one of the triggers which is what happened last time right before the dot-com bus was the federal reserve raised interest rate because they were worried about inflation could we have a situation this time too that the fed needs to raise interest rates because of tariffs additional tariffs being put on which gets passed through into consumer prices because of the otherwise general high levels of demand in the us that we're seeing so if there is surprise inflation and the fed has to raise interest rates which is not something markets are expecting then you could see a sudden tightening in financial conditions and that could prick a bubble let's talk [00:12:04] Speaker 2: about the fed then there is some pressure on it from the political side from president trump i mean how important is it is an orthodox view that central banks should be independent of the political cycle so that they can set long-term policies that can contain inflation what do you see is that a risk that that might be eroded that kind of independence in the us and potentially elsewhere so i'd say there are [00:12:30] Geeta Gopinath: two kinds of policies on which economists agree one is that trade helps countries and people and yes it may have some flaws and it needs to be carefully managed but in general it is a positive the second is central bank independence which is that if you want to have low inflation in your country which then will keep interest rates low for you you do need to have an independent central bank now to be clear when we say independent central bank does not that does not mean the central bank is not accountable to anybody this is about operational independence which is given the mandate that has come from the political class from congress in the case of the us given that mandate the actual execution of that mandate [00:13:15] Speaker 2: stays within a independent central bank let's go back to these risks to growth then you mentioned the potential of a tech bubble or something like the dot-com bubble um a couple of decades ago there are geopolitical risks aren't there we've got we already mentioned greenland iran venezuela all places that america is potentially involved in there are always geopolitical risks aren't there do you think this [00:13:45] Geeta Gopinath: particularly there's a we're at a particularly risky moment now the geopolitical risks we're seeing right now are profound for at least our generation if not for at least two generations at this point we had 80 years of a peace dividend especially after 1990 and the end of the cold war you had countries coming together closer integration peace and there was growth it was not perfect it was absolutely the case that there were jobs that were lost in some countries because of too much of open trade that was a risk that i think we all have to deal with now but that said what we're seeing now especially with this shift in terms of the relation between us and europe that is something that i don't think anybody predicted last year in davos there was the sense that we could see some decoupling between the west and china but the fact that there would be a breaking up of the alliance of the west is not something that [00:14:44] Speaker 2: we predicted and is that something that has global implications or is it just europe needs to sort itself out or is china looking and russia is looking and the global south is looking at that relationship between [00:15:00] Geeta Gopinath: the usa and europe it has huge global implications if you look at europe itself i mean europe is now going and making trade relations with other countries the deal on mercozo which they signed recently they've been working on it for many many years and though there's still been pushed back from member states they pushed it through i think it's a statement about the fact that europe says well we need to have some other friends maybe and build those other relationships similarly in their dealings with china so the global order is being shifted around who you work with new alliances are being formed however temporary they may be but you are seeing those shifts happen this is a very consequential relation between the us and the and europe and ruptures of the kind that we're seeing will have [00:15:50] Speaker 2: big implications for everyone another risk that economists always flag up is debt national debt government debt being a big risk is that just being overshadowed it's still there right but is it being [00:16:02] Geeta Gopinath: overshadowed by these other things if we didn't have this large scale of geopolitical tension and tariffs that's the risk we would be talking about which is debt the fact that almost all countries in the world are sitting on record high levels of debt without a clear path on how that will be brought down is indeed a very important risk that we are facing in addition to everything else that we have [00:16:30] Speaker 2: so where's growth where can it come from you pointed out over the last year massive growth stimulated by investment in ai which had knock-on effects around the world you're slightly worried or you're worried to whatever extent that this might be a bubble are there other areas that we could achieve economic growth [00:16:49] Geeta Gopinath: i do think ai will help with economic growth there are going to be productivity effects whether it takes a couple of years or longer we have to see but i think that is an important source of growth because it's a general purpose technology it can transform all fields that we're looking at right of course what we do need to keep our eye on is what's happening with jobs so are we going to be creating growth that is jobless and that is a risk that we do need to worry about and i am concerned that especially if this transformation happens very rapidly where there's a real risk of that happening you could end up with a shrinking of the middle class and leading to civil you know conflict people protesting that will not people will not stay quiet in the phase of it lots of people losing their jobs how long do you think that will take to go at this at this moment given what we know i think we're it's quite uncertain the effect on productivity we still have a fairly wide range of estimates anywhere between adding 0.1 percent to productivity growth on a yearly basis to one and a half percent of product to productivity growth so there is a big range over there similarly the impact on jobs there is a concern that the you know young people coming on the job market are having a harder time finding jobs because of the ability of ai to replace them but at the same time there are also young people who are going much more quickly into entrepreneurship because the technology helps them start new enterprises so [00:18:28] Speaker 2: we're still in the pr in the phase of figuring this out the energy price and the oil price is something that is very important when it comes to how the economy functions i wonder whether again that's something like you said everything changed nothing changed you've had the intervention in venezuela you've got concerns over what might happen in iran these countries with massive fossil fuel reserves but the oil price i don't think has changed that much compared to how dramatic the geopolitical situation is where do you see the oil price and energy prices in general going so energy prices are [00:19:03] Geeta Gopinath: you know oil especially is going to be in the low 60s that's the most likely outcome you know the reason why venezuela didn't have any big effect is because even though it has a large amount of supply getting that out of the ground is going to take time there's been such damage to their infrastructure that this is not going to happen overnight that will take time iran is like about one percent of the oil market so it is consequential but it is not a huge effect on uh on oil markets as such and there's a lot [00:19:34] Speaker 2: of supply coming from other parts of the world um what about the energy transition because that was often touted not least here in davos as a driver of growth investment in new types of energy or different types of energy green energy energy storage we're hearing less about that maybe in the headlines right now is there still an energy transition going on and is it somewhere that people should be [00:19:57] Geeta Gopinath: investing in and looking for growth there is an energy transition going on and for several countries especially for emerging and developing countries that otherwise would import a lot of their energy that is a source of growth for them it's not just about sustainability but it's also just about job creation and having to rely less on imported fuel this is going to be a big source important source of growth for them they're investing in it solar wind hydro all of those different uh forms of sustainable energy that's the direction in which that will continue i mean china is doing a lot i think china is continuing to be on the forefront of uh green of the green transition india is also paying attention doing the investments that are needed you know pollution is a big challenge in india right now so even if you are not so worried about sustainability from a global perspective the fact that you have to get rid of in of the high levels of pollution itself will want will move you in the green direction and weather events are highly consequential for the world and that will remain the case you mentioned [00:21:05] Speaker 2: china what if you just give us an overview of where you see china's economy going because it's a very different type of economy to the places we've mostly been talking about up till now north america and europe [00:21:16] Geeta Gopinath: china is has relied quite a bit on export-led growth in these last two years because if you look at domestic consumption that has been fairly weak and they haven't solved that problem so in china growth for 2025 is around five percent it's projected to go down to four and a half percent they still have a problem with their property sector there was over investment in that particular sector we still have been seen in the reallocation of resources away from property to other markets efficiently that is still a challenge it's an aging population the population shrank for the fourth year in a row that's another headwind and productivity growth in china has not been very strong so for all those reasons if you look out into the medium term we should expect china's growth to slow to around three and a half percent or so china cannot rely on export driven growth for multiple reasons one it's just too large an economy to be able to grow just on the export side secondly other countries are not going to take in such large amounts of goods you know they will slap tariffs very quickly and they would be you know justified to do that even by wto rolls for because of anti-dumping reasons so china does need to move towards a growth strategy that is more domestic demand driven that's going to require stronger social safety nets for households in china so that people don't feel like they have to save that much and they have to invest in productivity moving away from state-owned capital to moving towards [00:22:50] Speaker 2: a much more private enterprise and will that i mean they've made a start in that do you see that [00:22:56] Geeta Gopinath: continuing they had made a big shift in that right after the great financial crisis but then i think after the pandemic they seem to have moved drifted sideways again back into export-led growth the most recent 15 plan that they came up with still talks about investing in the new sectors in you know frontier sectors like ai frontier energy sectors and so on and not enough on the need to have high levels of consumption so i'm not sure that they've made the switch i think maybe silently quietly they recognize that they cannot have overproduction in every sector that is a problem because you could end up with you know having to worry about prices going too low which is a problem that china has and no other country does so they need to do more in terms of reorienting the economy inwards relying more on consumption local demand driven growth as opposed to external growth i don't see a big dramatic shift in the policy is being made but so this is going to take time i suspect they'll only move slowly [00:24:04] Speaker 2: industrial policy this used to be seen as a thing of the past certainly in you know in the west governments getting involved in economies that many economists would say you know let the market sort this out it's come back hasn't it where do you see industrial policy going from here [00:24:25] Geeta Gopinath: so industrial policy has been around for a while and i would say china did do a lot of it for many many years it's not just in the form of providing a direct subsidy or a tax break to companies but also in terms of cheap credit and cheap land that generated you know very large amounts of production capacity in many different sectors including automobiles you know electric vehicles but also solar and so on in the case of china now other countries are also reacting partly to what happened in china but also now there is a big concern especially after russia's invasion of ukraine about national security concerns and so there is this need to encourage certain kinds of sectors at home be it chips be it rare arts be it energy be defense to ensure that you have some level of national security that's still maintained so i expect industrial policy is going to be here for a little for a while it is still important though to have guardrails because you could end up in a situation where governments are spending a whole lot of money which they just cannot afford given their level of debt so to do it if you were going to do it do it in a targeted manner on a temporary basis is going to be very important i mean [00:25:43] Speaker 2: what are the risks of it though if it's done badly if it's done badly firstly you're not going to get [00:25:48] Geeta Gopinath: any of the benefits of the industrial policy because you end up with misallocating resources and you don't see that in growth and you don't see that in enough jobs being created that would be one consequence the second of course is if you end up spending a whole lot and the economy does grow then your debt as ratio gdp is going to go up even more and how are you going to pay your bills so the interest rates will go up and that will just be bad for all other parts of the economy that are not benefiting from industrial policy so we're sitting here in davos [00:26:18] Speaker 2: looking out to the rest of 2026 i'm going to ask you what you expect to happen in 2026 i'll just quote again from your article in the financial times the reality is that 2025 was a year when everything changed the question now is whether 2026 will be the year we correct course so do you think it will be [00:26:36] Geeta Gopinath: unfortunately 2026 has not started off that well with the us push for greenland and the rupturing of relations further between the us and the european union this gives me great concern so we're certainly not correcting course we seem to going off course but i want to remain hopeful all the important leaders are here in davos they have an opportunity to come together and i believe they will so my hope is that they will find a way of de-escalating because that is super important for every human being on this [00:27:11] Speaker 2: planet by the time this goes out they will have met i'm sure there'll be ongoing conversations by the time this goes out in a few days time gita gopina thanks so much for joining us on radio davos thank you robin for more analysis of the global economy check out the forum's chief economist outlook and the radio davos episode on that featuring the head of economics research at barclays investment bank christian keller links to that podcast and the report in the show notes we've been recording lots of great interviews here in davos to be sure not to miss them please follow radio davos and our sister podcast meet the leader wherever you get podcasts or at wef.ch slash podcasts i'm robin pommerer at the world economic forum thanks to you for listening and watching and goodbye for now