Chief Economists' Outlook January 2026: reassuring resilience and a 'good' bubble?

[MUSIC PLAYING] Welcome to Radio Davos, the podcast from the World Economic Forum that looks at the biggest challenges and how we might solve them. This week, as the World Economic Forum starts its annual meeting in Davos, Switzerland, it has just launched the latest edition of the Chief Economist's Outlook. That's the survey of chief economists around the world that the forum publishes every four months. It reflects both the state of the economy right now and what to look out for in the future. I'm John Letzing, economics editor at the forum, and helping me assess the state of the global economy as Kristian Keller, head of economics research at Barclays Investment Bank. Welcome, Kristian. Hi, John. Happy to be here. So the latest Outlook describes the prevailing mood as one of vigilant anticipation. I'm wondering if you think that's an accurate description of the mood and sort of what your big picture take away is from this edition of the Outlook. Yeah, plus, I mean, I would say the Outlook, it's a briefing. I think it's useful. It's a pretty diverse group of chief economists, not only financial sector, but really from across the private sector, from mining to tech, to retail. And I think that's a useful overview of opinion that the World Economic Forum puts together. And while if you go back, it's rarely that you make the right forecast, but it's still a good, I think, a good instrument to have to go into the year. I think I now once said, plans are nothing. Planning is everything. And so I think this is how I view this Outlook in the survey. As you say, it's coming out every four months. And even if you believe the predictions are not necessarily right, it gives you a nice kind of a time-consistent view how things and how views of off-economists who look at this develop over time. Now, you said about the current Outlook, I think it is really reflecting attention that economists have. And that is between seeing a lot of fundamental developments. When you look at fragmentation of global trade investment patterns, intensifying geopolitical tensions. And you look at those, and you would think that's pretty negative. But then you see at the same time financial markets have reacted quite well. And they've been continuing to rally, if you want. And so how do you put those two together? Are they consistent? There's something need to adjust. I think AI plays a big role that was discussed in the survey as well. I think the one positive development that maybe overshadowed a lot of the negative developments that I just mentioned was this big AI investment boom. And now I think you feel the tension in this survey between economists on the one hand, seeing these developments that shouldn't be good for a global economy. As I said, the trade tension, the fragmentation of the global economy. And then on the other hand, you see the big promise of AI, the already happening investment boom and the promise of future productivity growth. And I think this tension, and whether there could be a potential adjustment, for example, in tech valuations, I think that has really been a characteristic of this report. I think for anyone who has paid any attention to any economic or financial or really any news in the past year. So they probably heard a lot about tariffs and protectionism. And they may have heard from economists about all of the negative impact they may have. And yet, as you point out, the global economy has proven seemingly pretty resilient. So were economists potentially at least a little bit wrong about tariffs or how do we explain the resilience? Yeah, I think you put your finger into something that economists have been already debating all last year. I mean, if you look at it, not only us as a group, but also the IMF, World Bank, almost all international organizations, all economists had to several times revise up their forecasts from earlier forecasts, and particularly from forecasts that were made after the events in April. And you know, we're telling the entire story, but I do think it's important. The announcement on liberal, so-called liberation day about massive tariffs, you know, really at a big impact on markets and economists looked at this and said, "Well, this is going to be horrible from a perspective of what the tariffs will do, but also from the massive uncertainty we'll create." Now, what happened since then was, A, the tariffs weren't implemented to the extent that they were announced. So the markets quickly realized that and calmed down. A second, you know, there was a big delay in the implementation. There are a lot of exemptions. You know, we can go through them. There's been front-running. There's also a lot of transshipments too. Ultimately, the tariffs were less in a way that initially feared. Maybe economists also underestimated a bit the agility of the private sector in preparing and being able to deal with these kind of annex, oh, and not fully unexpected, but, you know, these kind of shocks. So I think their, you know, economists cannot completely disown this, you know, they were wrong. But I think there's a point we made that a lot of this was delayed. And also, by the way, a lot of this may still come. For example, you know, a lot of the price increases or US core goods may still happening in 2026. So I think the same way economists were probably wrong, expecting things to immediately deteriorate. It may now be wrong to be overly optimistic that there will be no impact from this going forward when maybe some of these things, many of these things are still in the pipeline to, to, to, to, you know, have negative impacts in 2026 and beyond. And you mentioned front loading, right? And maybe we should explain a little bit what that means. That is, if I understand, right, that essentially companies in anticipation of tariffs imported or exported or essentially got goods to where they wanted to get them before the tariffs came into effect, is that right? Very much so, you know, even though a liberation day came as a surprise in the sense of the level of the, you know, the rates that were announced were very much higher than people may be anticipated. But it was very clear from the election of Trump already, you know, in November of 2024, you know, that there would be tariffs. And so companies were quite good in filling their warehouses and, you know, doing exactly what you said, front running the tariffs in the sense of, you know, getting, getting this stuff into the warehouse, into the inventories before the tariffs came. And now, you know, that meant that they could then, you know, would not have to import off when the high tariffs came. This, of course, cannot last forever, right? At some point, the warehouse is depleted. You got to import, you know, the stuff at a higher tariff. And that will, you will have to pass through to consumers. If not, you have such a high margin that you say, oh, I reduced my margin, but a lot of the companies are not able to do this. And we know, you know, also from what companies say, that as they have the higher, you know, higher inventory costs they would have to pass them through. There's also a lot of transshipment going on. So what you see now is that goods could no longer go from China directly in the US. They go through Vietnam, through Mexico and lower tariffs. And so ultimately, you know, goods no longer as direct Chinese goods imports, but through other countries are coming into the US. It's a question how strongly the US really wants to, you know, you know, way close that down or whether actually there's an implicit understanding that that is a way our one can still, you know, keep cheap goods coming in from China through this kind of a, you know, kind of reroute it. And then in terms of AI and AI adoption, that's a big part of the outlook, of course. One thing that jumped out at me was the chief economist's responses about projected impact on employment and job losses related to AI. Now, they seem to believe that even 10 years from now, we'll be seeing some job losses related to AI. And that seems a bit daunting. Is it as daunting as it seems though? May I take one step back? I think we talked a little about the tariffs about the economic impact. I think what economists did not see last year. And then I come to your question on employment and the outlook for AI. What economists did not see, even though AI already existed, right? The large language models already were a few years old. And the massive investment boom in AI and what that created, that offset a lot of the negative effect from tariffs. You saw large investments. You saw these also massive evaluation improvements on stock markets, which create a wealth effect, which is important not for all Americans, but for many Americans. So you had Americans boosted their wealth through, you know, these elevated stock valuations. They were willing to spend that supported consumption. So AI had an impact directly through increased investment in AI related assets. Energy, data, such etc. But it's the same trend through the wealth effect. Just to say that that was a very, very important effect in 2025, while things did probably better than they had done if we had just the trade war, if you want, without the AI. Now, on the outlook for AI and on drops, there is always this tension between, you know, how much will, you know, will a new technology substitute or complement? And to the extent that its substitutes automates, jobs are lost. And to the extent that it compliments, people become more productive can, you know, earn higher wages. And that has been in history through, you know, all the technology advances that we have seen always been a positive. And, you know, jobs will certainly be lost in certain areas. The question is, what new jobs will be created that we may not even think of today? So whether the net effect will be, you know, that we have less work. I know that this is something that comes out in the survey. But, you know, as long as you don't have, maybe what people call, you know, singularity. The artificial generator AI, where machines do everything. It would seem that the past has told us, you know, there'll be new jobs and that we cannot even think of. And, typically, you know, these massive unemployment scenarios never play out. I would say one thing, though, is it's not so much about having a job and whether there's some work for humans to do. It's also a question of how they will be remunerated. And so a person for whom AI is an accelerated complement. And the person who can do more, more productive, be more productive in their job, they may earn more, including the people obviously who own the capital, you know, who sell AI or own AI. But there may be people who, you know, still find jobs. But if they're automated under the fear of substitution of automation, you know, that will have an impact on their job. So maybe not an issue so much of job losses, but of rising inequality in pay. And we discussed, of course, some of the positive effects of this AI investment boom, there has, of course, also been talked about whether or not that constitutes a bubble. And there seems to be some sentiment in this outlook, some anticipation of a reckoning of some sort, whether it's a bubble burst or a drawdown. However, you want to describe it. Do you see an event like that on the horizon, I guess? And why should someone, even someone who maybe not even directly or indirectly owns AI-related stocks in the US? Why should somebody like that, I guess, be concerned about something like that? It's the question, I think, at the moment, because I, you know, as I said earlier, a lot of the outperformers of the US economy, despite all these policy disruptions, was really on the basis of AI, as I discussed earlier. So whether this is sustainable, or whether this is now in the area of bubble of euphoria, is really a key question. And it's a macro economic question. It's no longer an issue of, oh, do I own that particular stock? And may I lose money after making a lot in the last few years? It's a matter of macro stability or macro performance, in terms of growth. And it will affect probably everyone. I mean, first of all, I would say, you know, even those who believe they don't own tech stocks, they may not, in a portfolio, whether directly own them, but if they have some kind of investment or they have a, you know, ancient invested in stocks, they're probably more exposed than they may think. Even if they're not in the US, because the US stocks have such a large share in global, in the global value of stocks, and, and, and the magnificent seven of the, you know, the highly concentrated tech stocks play such a large role that probably, you know, everyone will be affected, even though those who obviously own them in large shares, you know, will be affected most. The reason why people have been more relaxed about this, at this point, is that, A, you know, in contrast, for example, the dot com bubble part of that, often cited from the from the late 90s, and, you know, so far, at least, you know, the boom in investment has not been driven by debt. These are companies, large companies, well-established business models with very good earnings and very high cash cushions. They use that cushion and their earnings to invest in something they believe in, which is already driving earnings, but they believe can boost earnings massively in the future due to increased productivity, etc. So that is the theme, and that I think creates a lot more confidence by a lot of investors. Now, more recently, as many have pointed out, the debt part of it is increasing. You know, for example, investments in energy in the necessary data center, energy nets, etc. That is now a lot of times done by debt. We have record debt issuance already in the in the first few weeks of this year. So, you know, the more debt is involved, the bigger leverages. And that, of course, depending on how long it goes, then creates more risk. And the biggest of biggest risk we saw in the GFC, when, you know, there was a lot of widespread leverage by the man households as well. And, of course, invested in real estate, real estate plays a very particular role in collateral for banking, for banks, etc. This time, the leverage is more concentrated. It's not with households. It banking system, the banking system is not that involved. This is not, as I said, it's not a driven by the real estate sector. It's not an unproductive investment, you know, it's not houses. It's supposedly investment in something that should cut our pool to us into a, you know, high productivity era. And those are the reasons why people say, look, even if it is a bubble, it's probably a good bubble. You know, if some valuations correct, we may end up still with having good infrastructure, tech infrastructure, which should help us. People use the example of the fiber optic cables of the '90s that were laid, you know, telecom companies who did it didn't do well. But they created an infrastructure that then really provided the basis for an development of a digital economy. And when you say GFC, of course, you're referring to, I guess, the great-- The global financial crisis in 2008, yeah. Maybe we can turn a little bit to cost of living. Cost of living is very serious issues in some places more than others. Can have a very, very significant impact and far-reaching results. Looking ahead to the year, where do you see inflation biting, maybe the most, and why is that a concern? Let me make one point up front. And, you know, economists are very used to talk about inflation, which is a rate. And then we talk an acceleration and a deceleration of that rate, of increase year on year. But I think why it touches so many people is, you know, they look at price levels. You know, you go to Manhattan and you buy a coffee and you remember what price you bought it for five or, you know, let's say six years ago, it just shocks you, even though the price may not have increased from last year. So the inflation of that coffee from last year to now may not have been that high. But the cost inflation was so high a few years ago. We now dealing with levels that, you know, people on the street, or, you know, consumers are confronted with every day. And if their wages didn't go up by the same amount, even if you tell them inflation is not much lower, but they see the level of the price. I think this is very important for the for the debate. I think that's why it's so politically important. They played a huge role in the, in the, in New York, you know, may, may all race. And it will play a big role in the, in the upcoming midterm elections. And, and it's at the moment very much focused on the US. Because, you know, in Europe, affordability is an issue, but at least inflation rate is back at 2%. And since they're quite stable, US is still higher. And I think there's a bit more of an attention between, you know, a government wanting to, what growth to continue to be high and support that flu policy. While if you look at inflation itself, it would indicate to you that you actually should probably run a bit of a tighter macroeconomic policies. And, and, and, you know, that that tension, you know, could lead now, you know, maybe some governments opting for more direct intervention into prices, etc. And, you know, which sometimes by the population is seen as an immediate remedy, but history and economists, in a way, don't believe it. Because history has shown that that truth, it doesn't work. But I think it will be, it will be a key topic for 2026. Indeed, one of the more interesting things in this outlook that jumped out at me was a sentiment among chief economists that when it comes to public debt, it may be that many governments will be content to just let inflation reduce those public debt levels rather than any sort of active efforts on their part. Maybe could you help us understand a little bit how that might work and whether or not we think that's a good idea? Well, it's, you know, if you have a high debt, there's only a limit amount of how to deal with them. You know, you can outgrow it. You can, you know, and that has happened in episodes. You can, you can default. That's obviously everyone wants to avoid. Or you can do a mixture of what you just described. You in a way try to inflate it away. Now, typically in markets, if they are free to buy your debt, if they realize inflation is high, they will demand a high interest rate. And depending, you know, on your profile of debt, how short the materialities are, whether it is linked to inflation, it is not that easy. You know, investors are not stupid in buying that. So you have to do what we call financial repression. So you force them through some rules or so to buy that. And then you inflate it away. So they hold that at negative real rates, which is key, right? I think what, you know, and governments always may try to do this. And I think at the moment, there's also the feeling of, you know, let's keep nominal growth high, which is, you know, on one hand, inflation, but also, you know, new policies that continue to boost growth, or at least help, either keep growth high in the case of the U.S. or bring growth up in the case of Europe, for example. And if you have high nominal growth, as long as that high, or at least the same level as your nominal interest rate, you could keep that stable. I think this is what governments try. I think ultimately, maybe not in all economies, but in many, there will be a time of reckoning. It always comes a bit later than maybe economists thought, but at some point, I think there will be probably more painful fiscal measures that will be necessary. One other aspect of the outlook is sentiment on what the impact of these debt loads will be on spending priorities and governments having to sort of do more picking and choosing of where they want to spend and where they cannot spend as much anymore. Economists seem to believe that when it comes to defense, all bets are off and spending will ramp up. However, when it comes to environmental protection, most likely spending declines. I'm wondering, would you generally agree with that outlook? I think in general, if you want to call it ESG or generally the emphasis on making that climate transition, if you want, or the tradition to climate friendly energies, that was spared at very much by Europe, but also the US under the previous administration. I think that is clearly come to an end. If not everyone is in the boat and very large global emitters are not no longer want to implement the same policies, it makes less and less sense for the other economies to do it because it's a public good. Even then, if you try to do it, raise your costs for energy, others don't do it in the mid. You would have a double negative whammy. The climate won't have a feeling of impact, and at the same time, your only economy becomes less and less competitive with the others. I think this is a true that there has now been a shift, and certainly a shift towards wanting to or having to spend more on defense, on military. Clearly, in Europe, this is one of the biggest realizations, maybe of the last 12 months in particular. As you mentioned in Europe, particularly, there may be some people who are happy to see a decline in let's say green spending because they might feel like the region has gotten a bit ahead of itself at the expense of economic growth more broadly. How much validity is there to that, and is that maybe a bit of a dangerous road to go down? As I said, Europe was bareheading this, but to some extent, it can only work if, as I said, if everyone does it together. At the same time, you look at energy costs in Europe, particularly in core industrial countries like Germany, which are just much higher than the rest of the world, and companies feel this. I think it's only a natural and probably fair reaction of these countries. I would just say, look, we can't pull this through by ourselves. There probably also, one has to be frank, in the spirit of wanting to address climate change, there was probably sometimes a bit naivety, I would call it, in the way how it speaks, specifically about Germany, of how the energy transition was promoted and was pushed forward, maybe not thinking through all the different angles, and then the viability of it, and the base energy, et cetera. I don't want to go too far and also don't claim to be an expert on it, but I think there's a realization now at some points that this was maybe not fully thought through, and in particular, it cannot be pushed through when there's no global agreement of how one wants to go ahead with this. I would be remiss if I did not ask about this because it's so much in the news right now, and absolutely don't need to get into specifics of any particular country or any political aspect, but the issue of central bank independence, in a very general sense, is it true that most countries make at least some effort to separate the people managing the money supply, the central bankers, and politics? And if so, why generally do they try to do that? You touch on a very fundamental issue, and I think the history has shown that when central banks became independent, and also some people attached to it, we became a clear mandate of a certain inflation target, or at least on price stability coupled with independent, at least from the policy decisions that had as contributed to reduced inflation. And I think historically, you can show this quite well if you look from inflation from the 60s, 70s, 80s, and then how it came down, in the 90s, it stabilised expectations. It's very hard to negate this. You know, what can talk about here and there, certain models and different types of independence, but overall, I think a central bank independence has shown to have a contribute a lot to low and stable inflation. And it may be sometimes be underestimated how much the global economy or consumers, everyone, really benefited from low and stable inflation. Once you had it for a few decades, and people who always lived with it, they may forget that the benefits of it. And obviously, you know, there has been a shock during, you know, related to COVID and the monetary policy that was, how it was conducted at the time, and, you know, there's a lot of criticism about that, no doubt. And the inflationary shock that we saw in those years, you know, that that's something that, you know, that population still have to digest. But, you know, whether the response to this is now to throw central bank independence, you know, out, I would very much doubt that there will be a good response. I would say that at the moment, when I look at markets, you know, how they have reacted so far, they seem to be still quite quite unconcerned, if you want, you know, after announcements in the U.S. in recent days, I look at markets here and, you know, whether it's a 10-year break-even inflation, five-year-five inflation forwards, you know, all the risk premiums that we expect to jump hasn't really moved much. So, it seems that the markets at least still seem to be quite convinced that that message I just said, you know, the fundamental belief that central bank should remain independent is still strong enough. Is there anything else from the outlook or otherwise that we should cover? You know, maybe just make a few points on inflation that we were talking about it. And, you know, the interesting part is now that is actually, if you look at it globally, the development is quite diverse. There was a time when inflation was going up everywhere, and there was going down everywhere. Now we have a situation whereby, as I said, the U.S. is still grappling with high prices and still an inflation that is above the 2 percent target. Europe is at the 2 percent, but a very large economy, second largest economy in the world, China, is actually in the opposite situation where we have deflationary tendencies, and their economists often would propose that they should loosen, for example, the monetary policy further to help domestic consumption and help domestic consumption in a way to drive a little bit more demand to bring prices up, because this inflation in Japan, of almost deflation, is really a sign of a very weak demand. So, I think it's important to point out that the inflationary picture globally is quite diverse by now. And I think I would also make the point of energy. We talked about it in the connection of climate policy, but maybe another point that was one of the surprises in 2005 was the continuous decline of energy prices, despite a lot of geopolitical tensions. And the OPEC Saudi Arabia, particularly here, out by boosting production despite, in a relatively muted demand, that helped to bring prices down. We now have additional geopolitical developments, but that has helped a lot with inflation, one has to say, energy inflation, energy goes everywhere, it goes into food, into a lot of prices, and the fact that that has come down, and the question whether it will stay where it is now go down even further, I think will be an important aspect for 2026 as well. Is it fair to attribute any of that inflation in the US to tariffs, directly? When we see so far as the following, some of the core goods, that core good inflation, it has been going up, and we expect it to go up further in the coming months. So, this clearly passed through from tariffs into core goods, there's no doubt. However, the headline number of that consumer basket, that is, to a large extent, actually no longer core goods, we live in a service society, and a lot of the service prices have been behaving quite favorably, in particular, for example, rents in the US. And so, that's why if you look at overall inflation so far, you know, has behaved maybe more, has been more moderately increasing than than the economy is going to fall just from the tariffs. The question is in a way with this hold going forward into into 2026. Kristian Keller, head of economics research at Barclay's investment bank. Thanks for joining us on Radio Davos. Thanks, John, great pleasure. You can read the chief economist's outlook on our website, links in the show notes. 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