What Chief Economists Are Worried About Right Now

The World Economic Forum just dropped its latest Chief Economist's Outlook, and Christian Keller from Barclays broke it down on Radio Davos. The tldr is that nobody's sure if we're about to hit a wall, but everyone's watching really closely.

2025 should've been rough. Tariffs were supposed to tank the economy, but AI investment created this massive counterweight that kept things afloat. Companies dumped money into data centers, energy infrastructure, and anything AI-adjacent, and that spending basically offset the trade tension drag.

Stock valuations shot up on the hype, which made people feel richer (if you own stocks or have a pension, you know what I mean), and feeling richer means spending more. That's not a small deal when consumption drives most of the economy.

The tension is that markets are pricing in a productivity revolution that hasn't actually happened yet. The investment is real and the earnings are real, but whether the payoff justifies current valuations is a different question entirely.

One thing working in favor of the bulls: unlike the dot-com bubble, this boom isn't debt-fueled. Big tech has cash cushions and strong earnings, so they're spending their own money. That's reassuring. What's less reassuring is that energy infrastructure spending is increasingly financed with debt, and record debt issuance in early 2026 suggests leverage is starting to creep back in.

Economists kept revising forecasts upward through 2025 because tariffs didn't wreck things like they thought. The panic after Liberation Day (when Trump announced the big tariffs) turned out to be overblown.

A few reasons why. The tariffs weren't implemented as aggressively as announced, so markets calmed down once they realized the bark was worse than the bite. There were delays and exemptions that gave companies time to adjust. And companies front-ran the tariffs hard by stuffing warehouses before rates kicked in.

Front-running works like this: you know tariffs are coming, so you import everything you can before they take effect, fill your inventory, and delay the price impact on your end. But warehouses run dry eventually, and when companies restock at the higher tariff rates, those costs get passed to consumers.

There's also transshipment happening where goods that used to go China to U.S. now route through Vietnam or Mexico at lower rates. Whether the U.S. cracks down or quietly allows it is still unclear, but for now it's keeping costs down.

The bigger point is that a lot of the tariff pain is still coming. Core goods inflation is already ticking up and it'll probably keep rising through 2026 as restocking happens at higher costs.

This shift is real and it's not subtle. Europe led the charge on green energy transitions but that momentum has stalled. If major emitters like China aren't implementing the same policies, European countries are just raising their own energy costs and hurting competitiveness without actually fixing the climate problem. It's a losing trade.

Keller mentioned Germany specifically as a country that maybe got ahead of itself on energy transition without fully thinking through base energy needs and industrial viability. That's a polite way of saying they made an expensive mess.

Meanwhile defense budgets are ramping up, especially in Europe. The realization over the past year is that military spending isn't optional anymore, and that's a major fiscal reallocation that'll define the next few years of government budgets.

The global picture isn't uniform. The U.S. is still above 2% and dealing with elevated price levels that frustrate consumers. Europe hit 2% and stabilized. China is dealing with deflation because domestic demand is weak.

That divergence matters because central banks are operating in totally different modes. The Fed is stuck between wanting growth and needing to control inflation. The ECB is more comfortable with where things are. The People's Bank of China should probably loosen to boost consumption, but deflationary pressure limits what they can do.

Energy prices helped a lot in 2025. Despite all the geopolitical tensions, oil kept falling because Saudi Arabia and OPEC boosted production even as demand stayed muted. That brought energy inflation down across the board which flows into food prices and basically everything else.

Whether energy stays low in 2026 or climbs back up is a big variable for inflation everywhere.

Public debt levels are high and governments don't have a plan. The Chief Economist's Outlook suggests many governments would rather let inflation erode debt value than actually cut spending or raise taxes.

That strategy works if you can keep nominal growth high (real growth plus inflation) and interest rates manageable. But it requires a delicate balance. Markets aren't stupid, and if investors see high inflation coming they demand higher rates, which makes the debt more expensive to service and defeats the whole point.

Keller calls this "financial repression" where governments essentially force investors to hold debt at negative real rates. It's not a great long-term solution but it might be the path of least resistance for a lot of countries right now.

At some point there'll probably be a reckoning. Fiscal adjustments will have to happen. Economists thought it would come sooner but governments keep kicking the can, which doesn't mean it won't happen, just that the pain might be worse when it finally does.

Chief economists expect AI to displace jobs even 10 years from now, which sounds grim. But Keller pushes back on the pure job loss narrative. New technology historically creates jobs we can't imagine yet. The steam engine didn't end work. Neither did computers.

The real issue is inequality, not total unemployment. Some workers will use AI as a productivity booster and earn more. Others will see their jobs automated or devalued and their wages will stagnate or fall. The people who own the AI infrastructure and capital will do extremely well.

So it's less about whether there will be jobs and more about what those jobs pay and who gets the good ones. If AI complements your work, you're golden. If it substitutes for you, that's a problem.

There's been noise about central bank independence lately, especially in the U.S. Keller's take is pretty straightforward: history shows that independent central banks with clear inflation mandates deliver low, stable inflation, and that benefits everyone.

The decades of low inflation before COVID weren't an accident. They came from credible, independent central banks managing expectations without political interference.

Markets seem unconcerned so far. Inflation expectations haven't spiked and risk premiums haven't jumped, which suggests investors still believe central bank independence is safe. But it's worth watching because once that credibility erodes it's really hard to get back.

The optimistic case is that AI delivers the productivity gains everyone's betting on, tariffs settle into something manageable, and governments navigate debt loads without major disruptions.

The pessimistic case is that AI valuations are a bubble that bursts, tariff pain hits harder in 2026 than 2025, and fiscal pressures force painful adjustments that slow growth.

Keller doesn't make a prediction, but he's clear about the tension. The global economy is balancing on a lot of assumptions right now. Markets are pricing in best-case for AI, a manageable path for tariffs, and continued policy support. If any of those assumptions break, things could get rough quickly.

The fault lines to watch are tech valuations, inflation divergence across regions, and fiscal sustainability. Those are where the whole landscape could shift.