As the World Economic Forum's Annual Meeting opens in Davos, a sharp divide is emerging between optimism in financial markets and the underlying economic risks that concern leading economists. The latest Chief Economists Outlook, released by the Forum, reveals a mood of "vigilant anticipation" as policymakers, investors, and business leaders navigate the conflicting forces of innovation, geopolitical shocks, and fiscal uncertainty.
"This outlook is a good instrument to go into the year," said Christian Keller, Head of Economics Research at Barclays Investment Bank, speaking to John Letzing, Economics Editor at the Forum, on Radio Davos. "You see fragmentation in trade, geopolitical tensions, and then at the same time, financial markets continuing to rally. Something has to adjust."
Keller pointed to the explosive growth in AI investments as the one force offsetting a darker global picture. "The big promise of AI, the already happening investment boom, and the wealth effect from stock market gains have supported consumption," he said. Yet, he warned that this optimism may not last if current valuations prove unsustainable. "Even if it is a bubble, it is probably a good bubble. It creates lasting infrastructure."
Letzing noted the surprising resilience of the global economy in the face of aggressive trade policies. Keller explained that the full impact of tariffs may still be delayed. "The tariffs were not implemented to the extent that they were announced. There were exemptions, delays, and front-loading of imports. But core goods inflation is likely to rise in 2026," he said. He also pointed to transshipment tactics, where goods bypass direct routes through intermediary countries like Vietnam and Mexico, softening the tariff blow but masking underlying pressures.
The conversation also addressed growing debt burdens. "Governments are relying on high nominal growth, including inflation, to stabilize debt," said Keller. However, he cautioned that "a time of reckoning will come," as structural reforms or spending cuts may become unavoidable.
Diverging inflation trends across the US, Europe, and China also underscore the complexity of the global landscape. The US faces sticky price levels, Europe has returned to near-target inflation, while China confronts deflationary signals.
Keller concluded with a warning on inequality and climate policy pullback. "The transition to clean energy cannot succeed without global alignment. Without it, competitiveness gaps widen, and green agendas falter."
