Hello and welcome to the GZERO World podcast. This is where you'll find extended versions of my interviews on public television. I'm Ian Bremmer, and today we are talking about what feels like a hinge moment for the global economy. First, there's trade. More than a year after the United States launched sweeping tariffs across much of the world, the aftershocks are still reverberating. Even efforts by the United States Supreme Court that diluted parts of Donald Trump's agenda haven't reversed the bigger shift. The system the United States spent decades building — a predictable, rules-based economic order — is giving way to something more fragmented, more politicized, and far more uncertain.
And now there's the Iran war and the energy crunch that comes with it. Fuel prices around the world are surging. And after living through one of the most severe inflation spikes in recent memory during Joe Biden's presidency, Americans will soon be facing renewed price pressure. So too Europe, which not that long ago overcame a different energy shock spurred by Russia's full-scale invasion of Ukraine. It's all something I get into with Gita Gopinath, former first deputy managing director and chief economist at the International Monetary Fund. Let's get to it.
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Gita Gopinath, welcome to GZERO World.
So earlier this year, I think it was at Davos, you said everything in the world economy has changed. And of course, that was before we saw even more change with the war in the Middle East. But I want to ask what you meant by that at the time.
So at the time, what I meant was looking at 2025. On one hand, it was a year when we had record-high tariffs set by the US. Volatility certainly shot up. China was retaliating. But if you looked at global growth, it looked like really nothing had happened. It was not any different from what we had projected before any of this chaos had happened. And so there was a risk that, okay, you might think, well, the world economy is so resilient that nothing has really changed. And I wanted to say don't be fooled, because as I see it, these kinds of policy shifts that we've seen over 2025, and it's playing out now in 2026, generate what I call structural damage. And structural damage doesn't show up. The cost of it doesn't show up immediately. It takes time. And the example I gave was of Brexit, which is when Brexit happened, for two years after Brexit, investment in the UK kept going up. And everybody was like, 'Oh, much ado about nothing, with tremendous uncertainty, but really it's not affecting the economy.' And now if you look back 10 years later, the economy is about 6 to 8% smaller than what it was projected pre-Brexit in terms of the pre-Brexit trajectory. So recognizing that when you have these big shifts in how countries engage with each other, you're not going to see anything immediately, but it's going to build up over time.
And how much of that was unilateral US tariffs and how much of that was knock-on beggar-thy-neighbor policies from everybody else?
I would say it's a combination. One, first, the US believing that it has not had a level playing field on world trade. But I think a bigger factor was just the preference of the leader, and in the case of the US, I mean Trump has always been a supporter of tariffs, and you know, for protectionist reasons basically saying that if we buy from outside then we're not building at home and that's bad for American workers. Now we can go to the facts and see what the truth is. But that narrative, along with the sense that the US has so much power, it's the dominant world economy, that maybe we should be able to extract some rents from that kind of power — that played out. And of course, there's no — I mean, it doesn't help that China has been also building up its own power on the other end. That combination has landed us where we are.
For me, it's less in a sense in terms of the structural damage. I worry less about the US and China. I worry about what's happening with the US and the European Union. That relationship got damaged in 2025. I mean, you know, Trump unfriended Europe. I think that's fair to say. And we're seeing that play out now in terms of the Iran war. We just have no cooperation across the Atlantic between these countries. And that's the kind of structural damage that's going to add up over time.
So now we have this Iran war. We have now a shutdown of the Strait of Hormuz, where we're more than a month into that. First, I want you to size this for me as you think about the likely global impact of this crisis. How does it compare to the pandemic? How does it compare to 2008? How does it compare to the Russian invasion of Ukraine?
No, that's actually a great question, to size it, because we keep getting hit by repeated events. We might as well now say which shock was bigger than the other, right? Compared to the pandemic, this is at this point tiny. I would say tiny. During the pandemic, the global economy shrank by 3%. At this point, given what we see is happening with energy prices, we would expect global growth to maybe drop by 0.3 percentage points. So instead of... Exactly.
So far, as of a month plus of the shutdown, that's what we're seeing?
And is that snowballing in size or is it sort of the same level of impact every additional month of shutdown?
It can change dramatically depending upon how much of the energy infrastructure is damaged, such that it takes many more years to bring back that energy onto the market. And so far there has been damage to Qatar's LNG plant. We've seen that, that's the biggest — but we haven't seen much else so far. So, but if this continues and given that this is still a hot war and the US can't control everything that happens — I mean, Iran is shooting off drones and missiles everywhere — we could see much bigger damage if there is a much larger increase, for example, in what people think oil prices are going to be. So, right now, I would say for the rest of the year, the average oil price on average is about $85, right? Before the war, it was $70. It's gone up to $85. Let's suppose we're now talking about $120, that this is where we are for the next 12 months on average. Then we're shaving off closer to a percentage point from growth, world growth, right? Those are much bigger numbers. It can get very nonlinear, too. We're not there yet. And we haven't seen markets crack and break in any fashion, but that could happen if we were in a much more seriously damaged energy infrastructure.
Let's say in a relatively mild scenario where after two to three months of almost complete shutdown of the strait, it starts to reopen, and there isn't any dramatic additional damage the way we've seen with Qatari LNG — it's three years off, it's $20 billion. At that point, does that mean roughly it's, let's say, a fifth of the total size of the pandemic?
I would say yes. I mean, we're talking about exactly maybe getting to about 20% of what the pandemic was. That's still small numbers compared to the pandemic.
But that's the good scenario, right? The plausible good scenario is we've done self-damage in a war in the Middle East, a fifth of the size of the global pandemic.
So, now let's talk about the different components of it. We've got, you mentioned the oil, of course, the natural gas. We've got the fertilizer. We have sand and the knock-on effects on food. We've got significant increase in cost of everything that involves all of these inputs, things like aluminum, things like helium, and of course all the plastics that come out of that, right? If you were talking about which of these things is likely to matter the most and also the time frame of it, right? Give us some sense.
So in terms of magnitudes, I would say oil and gas are up there in terms of being consequential for headline inflation. That is where we're going to see it immediately. We've already seen in terms of projections of what's happening with inflation, expectation is that global inflation is going to be higher by about 100 basis points because even now, in a good scenario, with what's happening with oil and natural gas prices, global inflation...
Global inflation, over the entire world, over let's say a year?
Yeah. So, compared to what was projected for 2026, projections are going up by about 100 basis points. This is headline inflation, not the inflation excluding energy costs, which is helpful to keep in mind because we often refer to what happened with tariffs in 2025 and inflation that was caused by tariffs. So, that was about 70 basis points in the US that was caused by tariffs, that shaved off about $600 from the typical American household's income. So this is like adding another $600 on top of that this year, at least, from the kinds of headline price increases that we're seeing. The other consequence, of course, is fertilizers, and that comes with a lag because there's always this gap between when you sow and when you reap. And as of now, we're not seeing it in food prices as much. But if this shortage continues, you could end up with planting not being sufficient and you could see it showing up in food prices in the future. So these next few weeks are super critical.
Now, we've already seen a national emergency in the Philippines. We've seen rationing in Indonesia. Are there any economies that are likely to face financial crisis over the coming months in a modest scenario or a medium scenario?
In a modest scenario, I would say the countries that are already in trouble and were coming out of trouble. Give you an example: Sri Lanka is a country that would have been better not to have had this external shock on top of everything that they're facing. So for a country like Sri Lanka, this clearly derails their recovery from the crisis that they had a couple of years ago. Pakistan is very heavily affected by it, and then they're shutting down, you know, production because of that, because of the cost of fuel. So it's mainly countries that are already in trouble of some kind and who are energy importers for whom this is a major trouble.
Unlike the Ukraine war in 2022, when by the way the oil and gas effects were much bigger than what we're seeing right now — I mean really by two to three times more than what we have in terms of the current Iran conflict — but it was not as if the Middle East couldn't ship oil or natural gas to parts of the world. So for a country like India that relies very heavily on imports from the Middle East, it's not the price — the price is consequential — but the bigger problem is you just don't have LPG, which is used for cooking, and therefore restaurants have to shut down because there's not enough gas cylinders available.
And you focused on Asian economies so far. Those are the economies that are going to face the brunt of this so far, in terms of the biggest impact, you know, outside of whether you live in the Middle East itself.
Of course. It's Asia, absolutely.
And sub-Saharan Africa, just in terms of the challenges of food.
Sub-Saharan Africa gets hit because the cost of all these inputs are going up. The cost of food will go up in these countries. They rely on fertilizers from these parts of the world. Yes, you know, unfortunately, every time there is a cost-of-living increase, the part of the world that feels it most strongly is sub-Saharan Africa.
Now, President Trump has said that because America produces and exports a lot of energy, that net-net this is going to be America making a lot of money. I understand that the average American is facing higher inflation, but if we look at American GDP, does this kind of not really move the needle very much?
Relative to other major economies, the US is much less affected negatively by this Iran conflict. Inflation does go up, and this is why I gave you the number about how you can shave off about $600 from the average income of Americans. But in terms of the effect on the economy, in terms of GDP, the effects are smaller. So if I gave you a kind of a ballpark, the effect on the world economy is around shaving off about 0.3 percentage points, is what I said. For the US it comes down more to like 0.1 or 0.15 percentage points.
What do we think about the ability of China to take advantage long-term of a crisis like this, in the sense that they have far more stockpiles of key resources? They're moving more quickly towards post-carbon energy in the future. They certainly seem, they project as if, 'We're better positioned, we're patient.' Is that reality, economically speaking?
They are better positioned right now, just in terms of how much they've stockpiled for their energy needs. Even though they rely on shipments from the Middle East, but still they also have other sources. Russia has been supplying a lot of energy to them. So they have more diversified sources of supply. You know, China has over the last, I would say, seven, eight years, especially after the Trump-one tariffs, decided that they need to become self-dependent and they need to build all kinds of strategic stockpiles because they're in a world where, you know, they may be cut off. And unfortunately the events of the last few weeks are basically reinforcing that view that they need to double down on the strategy of building up at home, becoming energy independent much more, but also pretty much on the tech sector and every other space.
The international response economically — when the pandemic hit there was just everyone throwing an enormous amount of money at the problem. We saw a lot of petroleum reserves, of course, opened up so you can get that into the markets. But has there been an adequate international response thus far, economically?
I think what's really stuck is the lack of agreement between the US and Europe on this war, and that is unique. And I don't think that's just the fact that the Europeans believe that they were not necessarily consulted before the attack happened, but it is because they've spent the early part of this year talking about Greenland and about how the US may take over Greenland, and what happened in 2025 when they were told that they are, you know, a failing continent.
So that negative sentiment that has unfortunately percolated over the last year with these two powers of the world is, I would say, the most consequential, and what will probably carry on into the future when I talked about structural damage.
I mean, I see that happening in terms of NATO and strategic alignment. I'm wondering how you see that playing out right now economically.
Economically, what that means is that Europe is going to — it's not going to happen overnight because it's going to take time — which is move towards greater energy independence, move towards greater defense self-reliance in terms of manufacturing of defense equipment, move towards greater independence of financial infrastructure in terms of payment rails. This will not again happen overnight, but we've decisively moved away from the view that Europe feels that, okay, we can just rely on the US as a consistent, solid ally all the time.
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So does this mean, if we think about the future of the global economy, that it's not just the United States not driving globalization, but it's actually an active fragmentation, an active decoupling of the way that global economies had been interdependent?
So what we are certainly seeing around the world is geopolitically driven fragmentation. Right? If you look at overall world trade to GDP, it looks like really nothing is happening. It looks relatively flat. But if you look underneath and you see who's trading with whom, geopolitics is beginning to rewire trade flows. And it's been changing slowly over the last seven years. Actually, you see this, and especially after Russia's invasion of Ukraine, that rewiring is happening. So what we're likely to see is much more regionalization, much more turning towards your allies as much as possible with the allies who are consistent over time, but also just a lot more of inward-looking, which is if you can bring more of those things home, especially what you think is critical, then that's what you do. So we're building in much more redundancy now into the world because everybody is going to duplicate production.
Sounds expensive. It sounds expensive, which means that that's going to put pressure on costs everywhere, and how much we can produce now, how much we can share, how efficiently we can work as an economy — we've certainly moved away from that, from an efficient trading system. Are there efficiencies to be gained, though, in the sense that the wave of globalization post-war we saw was so much about great labor efficiencies, and not only is labor cost much higher in China now, but you know, digital economy, you can hire pretty much anyone anywhere, right? It doesn't really matter. There's a lot of automation going on right now. So do we need the same level of peak globalization that you had experienced in the go-go '80s and '90s?
Well, firstly, I think we probably overdid the amount of focus on buying from the cheapest source, so much that countries forgot about, you know, supply chain risks that could happen, and we saw that during the pandemic. We also saw that with Russia's invasion of Ukraine. So national security concerns, communities that got left behind — there was clearly not enough attention paid to those aspects of global trade. So absolutely, there was a time for a bit of a reset, to do some resetting and to figure out, okay, these are sectors in which we can all agree that we need to have our own national industries for our national security reasons, and that would be okay. The problem is that we're in a system where there are simply no rules, arbitrary announcements of tariffs, tariffs being used for economic statecraft very clearly. You know, it's not about the fact that...
— or political statecraft, security. I've never...
Absolutely, right. It may be completely unrelated to whether you buy too much from me or I buy too much from you. It's just that I don't like the government in your country. That is unfortunately the place where we have landed, and that's where the risks to the world are so much higher.
So one more Iran-related question. It just — if you had a choice, as an economist, unfair question, between the Americans ending the war but the Iranians are still there with control over who does and who doesn't go through the strait, or the United States continuing the war for another one, two, three months — which of those concerns you more economically, and why?
