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.
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.
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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 Coffey Professor of Economics at Harvard University. Gita Gopinath, 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 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 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%, much higher than at the start of the year where it was around 3%. 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%, 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, 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 it have that impact that 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. Okay, so the first question then is why did it not, you know, bring GDP growth down?
So there was a time last year when economists thought that this could be highly consequential and even put the US economy in a recession. That was right after Liberation Day and the April 2nd tariffs. So that three-day window, 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 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 tariffs being paid by firms as they're importing into the US, that's even lower than the statutory rate, which is around 22, 23%. The actual tariff rate in terms of what they pay is 14%.
Why is that? Why is there a discrepancy?
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, their 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 brake rule and the effect of that is going to play out over the years, in this year and next year. The US 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 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 happened last year 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 US's trading partners. China was the one country that retaliated. Europe did not. But we're starting this year with threats of retaliation from the European Union because of the US'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 US because the US 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, 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 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 has 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 many, many years. Have you seen a time like this before? Is this a different scene?
Well, you know, I was chief 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 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 Europe. I mean, that alliance was a critical part of the global economic order and the fact that that is being ruptured is very consequential.
But 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. 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. 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 article, you said, I quote, 'The global economy is more fragile than headline numbers suggest.' So, what are the main risks? You've already described the potential kind of delayed impact of increased tariffs. Are there others?
So 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 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 during the dot-com. So it can be much more consequential.
How does it compare to that kind of 2008-2009 recession?
So that was a different crisis. The 2008-2009, you had also a big financial crisis but that affected banks. It was much 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 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 crisis? I am concerned about that.
I bet people ask you every day, okay, if there's a bubble, when is it 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 bust, was the Federal Reserve raised interest rates 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 about the Fed then. There is some pressure on it from the political side, from President Trump. I mean, how important is it? It's 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 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, you need to have an independent central bank. Now, to be clear, when we say independent central bank, 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 stays within an 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 a couple of decades ago. There are geopolitical risks, aren't there? We've already mentioned Greenland, Iran, Venezuela, all places that America is potentially involved in. There are always geopolitical risks, aren't there? Do you think 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 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 the US and Europe, that is something that I don't think anybody predicted last year in Davos. There was this 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 we predicted.
