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

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John Letzing, Economics Editor, World Economic Forum: 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 future.

I'm John Letzing, economics editor at the Forum, and helping me assess the state of the global economy is Christian Keller, head of economics research at Barclays Investment Bank.

Welcome Christian.

Christian Keller, Head of Economics Research, Barclays Investment Bank: Hi John, happy to be here.

John Letzing: 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 takeaway is from this edition of the outlook.

Christian Keller: Yes, of course. 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 is rarely that you make the right forecast, but it's still. It's a good, I think, a good instrument to have to go into the year. I think Eisenhower once said, you know, plans are nothing, planning is everything. And so I think this is how I view this outlook and 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 of things and how views of economists who look at this develop over time.

You said about the current outlook. I think it is really reflecting a tension 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, you look 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, you know, how do you put those two together? You know, are they consistent? Does something need to adjust?

I think AI plays a big role that was discussed in the survey as well. I think the maybe you know 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, you know, shouldn't be good for a global economy. You know, as I said, the trade tension, the fragmentation of the global economy, and 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.

John Letzing: I think for anyone who has paid any attention to any economic or financial or really any news in the past year or so, they've 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, so how do we explain the resilience?

Christian Keller: Yeah, I think, you know, you put your finger onto something that economists have been already debating all last year.

I mean, if you look at not only, you know, us as a group, but also the IMF, the World Bank, almost all international organisations, all economists had to several times revise up their forecasts from earlier forecasts, in particular from forecasts that were made after the events in April.

And you know not, you're retelling the entire story, but I do think it's important. You know, the announcement on so-called Liberation Day about massive tariffs really had a big impact on markets and economists looked at this and said, well, this is going to be horrible from the perspective of what the tariffs will do, but also from the massive uncertainty it will create.

Now what happened since then was, A, the tariffs weren't implemented to the extent that they were announced, so markets quickly realised that and calmed down. Second, 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 transhipments so 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 with these kind of unexposed or not fully unexpected. But, you know, these kind of shocks.

So I think economists cannot completely disown this, you know, they were wrong. But I think there's a point to be made that a lot of this was delayed. And also, by the way, a lot this may still come.

For example, you don't know the price increases for 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'll be no impact from this going forward when maybe some of these things, many of these things are still in the pipeline to have negative impacts in 2026 and beyond.

John Letzing: 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?

Christian Keller: Very much so. You know, even though Liberation Day came as a surprise in the sense of the level or the rates that were announced were much higher than people maybe anticipated, but it was very clear from the election of Trump already, you know, in November 2024, you know that there would be tariffs. And so companies were quite good in filling their warehouses and doing exactly what you said, front running the tariffs in getting this stuff into the warehouse, into the inventories, before the tariffs came.

And now, you know, that meant that they could then, you would not have to import when the high tariffs came, this of course cannot last forever, right? At some point, the warehouse is depleted. You got to import the stuff at a higher tariff and that you will have to pass through to consumers. If not, you have such a high margin that you say, oh, I'll reduce 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 will have to pass them through. I think that that was important.

Maybe one additional comment. There's also a lot of trans-shipment going on. So what you see now is that goods can no longer go from China directly in the U.S. They go through Vietnam, through Mexico, at lower tariffs, and so ultimately, You know, goods no longer as direct Chinese goods imports but through other the countries are coming into the U.S. It's a question of how strongly the U S really wants to in a way, close that down, or whether actually there's an implicit understanding that that is a way how one can still, cheap goods coming in from China through this kind of rerouting.

John Letzing: 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 economists' 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?

Christian Keller: May I take one step back? I think we talked a lot about the tariffs, about the economic impact. I think what economists did not see last year, and then I come to your question on unemployment and the outlook for AI. What economists did see, even though AI already existed, right, the large language models already were a few years old, the massive investment boom in AI and what that created, that offset a lot of the negative effects from tariffs.

You saw large investments. You saw these also massive valuation 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 sets, etc. But at the same time 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 jobs. There is always this tension between, you know, how much will a new technology substitute or complement. And to the extent that it substitutes, it automates, jobs are lost. And to extend that it complements, people become more productive, can earn higher wages, and that has been in history through all the technology advances that we've seen always been a positive.

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 general AI where machines do everything. It would seem that the past has told us, you know, there'll be new jobs that we cannot even think of.

And typically, you now, 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 accelerator, a complement. 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, who sell AI or own AI. But there may be people who still find jobs, but if they're automated under the fear of substitution of automation, that would have an impact on their job. So maybe not an issue so much of job losses, but of rising inequality, in pay.

John Letzing: And we discussed, of course, some of the positive effects of this AI investment boom. There has, of, course, also been talk 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?

Christian Keller: It's the question, I think, at the moment, because, as I said earlier, a lot of the outperformance 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 now is in the area of bubble of euphoria is really a key question. It's a macroeconomic question. It's no longer an issue of 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 where they directly own them, but if they have some kind of investment or they have a pension invested in stocks, probably more exposed than they may think. Even if they're not in the U.S. Because U. S. stocks have such a large share in the global value of stocks and the magnificent seven or the highly concentrated tech stocks play such a great role that probably everyone will be affected even though those who obviously own them in large shares would be impacted most.

The reason why people have been more relaxed about this at this point is that, A, in contrast, for example, the dot-com bubble that often cited from the from the late 90s, you know, so far, at least, 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 centre, energy nets, etc., that is now a lot of times done by debt. We have record debt issuance already in the first few weeks of this year. You know, the more debt is involved, the bigger leverage is. And that, of course, depending how long it goes, then creates more risk.

And the biggest risk we saw in the GFC, when there was a lot of widespread leverage, but among households as well, and of course invested in real estate, real estate plays a very particular role in collateral for banking, for banks, et cetera. This time, the leverage is more concentrated, it's not with households. The banking system is not that involved. This is not, as I said, it's not driven by the real estate sector. It's not an unproductive investment. You know, it is not houses. It's supposedly investment. It's something that should pull us into a 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 valuation is correct, we may end up still with having good infrastructure, tech infrastructure, which should help us. People use the example of the fibre optic cables of the 90s that were late. Telecom companies who did it didn't do well, but they created an infrastructure that then really provided the basis for the development of a digital economy.

John Letzing: And when you say GFC, of course, you're referring to...?

Christian Keller: The global financial crisis in 2008-9.

John Letzing: Maybe we could turn a little bit to cost of living. Cost of living is a very serious issue in some places more than others. It 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?

Christian Keller: Let me make one point up front, and economists are very used to talking 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 they look at price levels.

You go to Manhattan and you buy a coffee and you remember what price you bought it five or 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 been that high, but because inflation was so high a few years ago, we're now dealing with levels that people on the street or 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 now much lower, but they see the level of the price. I think this is very important for the debate. I think that's why it's so politically important. That played a huge role in the New York mayoral race and it will play a big role in the upcoming midterm elections.

And it's at the moment very much focused on the U.S. Because, you know, in Europe affordability is an issue but at least inflation rate is back at 2% and since they're quite stable. U. S. It's still higher and I think there's a bit more of a tension between, you know, a government wanting to, what, growth to continue to be high and support that through 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.

That tension, you know, could lead now, you know, maybe some governments opting for more direct intervention into prices, etc., you know which sometimes by the population is seen as an immediate remedy. But history and we economists in a way don't believe it because history has shown that it really doesn't work.

But I think it will be it will be a key topic 2026.

John Letzing: 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?

Christian Keller: Well, you know, if you have a high debt, there's only a limited amount of. how to deal with it. You know, you can outgrow it, you know, and that has happened in episodes. You can default, that's obviously what 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 markets, if they are free to buy your debt, if you realise inflation is high, they would demand a higher interest rate. And depending on your profile of debt, how short the maturities are, whether it linked to inflation, it is not that easy. Investors are not stupid in buying debt, so you have to do what we call financial repression. So you force them through some rules also to buy debt, and then you inflate it away, so they hold debt at negative real rates, which is key, right?

I think what, and governments always may try to do this, and I think at the moment, there's also the feeling of, let's keep nominal growth high, which is, on the 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 cases of Europe, for example.

And if you have high nominal growth, as long as that high or at the same level as your nominal interest rate, you can 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.

John Letzing: 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 defence, all bets are off and spending will ramp up. However, when it comes to environmental protection, most likely spending declines. I'm wondering, you know, would you generally agree with that outlook?

Christian Keller: I think in general, if you want to call it ESG, or in general the emphasis on making that climate transition, if you want, or the tradition to climate friendly energies, that was very much by Europe, but also the U.S. Under the previous administration. I think that has clearly come to an end.

And, you know, if not everyone is in the boat. You know, and very large global emitters are not, you know no longer want to, you know, implement the same policies. It makes less and less sense for the other economies to do it because it's a public good.

And so even then if you try to do it, raise your costs for energy, others don't do it and emit, you would have a double negative whammy. The climate won't feel any impact and at the same time your own economy becomes less and less competitive with the others.

So I think this is true that there has now been a shift and certainly a shift towards wanting to or having to spend more on defence on military. I mean clearly in Europe this is one of the biggest realisations maybe of the last 12 months in particular.

John Letzing: However, I mean, 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?

Christian Keller: As I said, Europe was spearheading this. But to some extent, it can only work, as I said. If everyone does it together. And I think at the same time, you look at energy costs in Europe, and particularly in core industrial countries like Germany, which are just much higher than the rest of the world, and companies feel this. And I thing it's only a natural and probably fair reaction of these countries now to say, look, I mean, you know, we can't pull this through by ourselves.

There's probably also, one has to be frank, in the, you know, in this spirit of wanting to address climate change, there was probably sometimes a bit of naivety, I would call it, in the way how, and I would speak specifically about Germany, of how the, you know the energy transition was promoted and was pushed forward, maybe not thinking through through all the different angles, and the viability of it, and base energy, etc. 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 realisation 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.

John Letzing: I would be remiss if I did not ask about this because it's so much in the news right now. 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 that.

Christian Keller: Look, you touched on a very fundamental issue, and I think that history has shown that when central banks became independent, and also some people attach it to 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 us contributed to reduce 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. One can talk about here and there certain models and different types of independence. But overall, I think central bank independence has shown to have contributed 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 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, that's something that populations still have to digest.

But whether the response to this is now to throw central bank independence out, I would very much doubt that that would be a good response.

I would say that at the moment when I look at markets, how they have reacted so far, they seem to be still quite unconcerned, if you want. After announcements in the U.S. In recent days, I look at markets here and whether it's a 10-year break even inflation, 5-year inflation forwards, all the risk premium you would expect to jump hasn't really moved much.

So it seems that the markets at least still seem to quite convinced that that message I just said, you know, the fundamental belief that central bank should remain independent, is still strong enough.

John Letzing: Is there anything else from the outlook or otherwise that we should cover?

Christian Keller: I would maybe make a few points on inflation since we were talking about it.

The interesting part is now there is actually, if you look at it globally, the development is quite diverse. There was a time when inflation was going up everywhere and then it 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 their 2 percent target. Europe is at their 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 there economists often would propose that they should loosen, for example, 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 the disinflation in Japan of almost deflation is really a sign of 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 '25 was the continuous decline of energy prices despite a lot of political tensions, and the OPEC, Saudi Arabia particularly, clearly here helped by boosting production despite relatively muted demand. That helped to bring oil 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 is now going even further, I think will be an important aspect for 2026 as well.

John Letzing: Is it fair to attribute any of that inflation in the U.S. to tariffs directly?

Christian Keller: What we see so far is the following. You know, some of the core goods, that core good inflation has been going up and we expect it to go up further in the coming month. So there's clearly pass-through form tariffs into core goods, there's no doubt.

However, the headline number of that consumer basket, you know, 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 favourably.

In particular, for example, rents in the US. And so that's why if you look at overall inflation so far, has behaved maybe more, has been more moderately increasing than economists would have thought just from the tariffs. The question is, in a way, will this hold going forward into 2026?

John Letzing: Christian Keller, head of economics research at Barclays Investment Bank, thanks for joining us on Radio Davos.

Christian Keller: Thanks, John. Great pleasure.

John Letzing: You can read the Chief Economist's Outlook on our website, links in the show notes.

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