Transcription
[music] Hello and welcome to the GZERO World podcast. This is where you'll find [music] extended versions of my interviews on public television. I'm Ian Bremer, and today we are [music] 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 [music] by the United States Supreme Court that diluted parts of Donald Trump's agenda haven't reversed the bigger shift.
The system the [music] United States spent decades building, a predictable rules-based economic order, giving way to something more fragmented, more politicized, and far [music] 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 [music] spikes in recent memory during Joe Biden's presidency, Americans will soon be facing [music] renewed price pressure.
So too Europe, which not that long ago overcame [music] a different energy shock spurred by Russia's full-scale invasion of Ukraine.
It's all something I get into with [music] Gita Goponath, former first deputy managing director and chief economist at the International Monetary Fund. [music] Let's get to it.
>> [music] >> The GZERO World podcast is brought to you by our lead sponsor, Prologis. Prologis helps businesses across the globe scale their supply chains with an expansive portfolio of logistics real estate and the only end-to-end solutions platform addressing the critical initiatives of global logistics today. Learn more at prologus.com. >> [music]
>> Gita Gonath, welcome to GZ World.
>> It's a pleasure, Ian.
>> 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. Politan 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 generates 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 to do 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 was, I would say it's a combination of one, first, the US believing that it has not had a level playing field on the world trade, but I think a bigger factor was just the preference of the leader, uh, 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 uh, American workers. Now we can go to the facts and see what the truth. 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 in the 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 straight of Hormuz where we're more than a month into that. Um, 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 [laughter] other, right?
Compared to the pandemic, this is at this point tiny. I would say tiny. During the pandemic, the global economy shrunk by 3%. At this point, given what we see is happening with energy prices, we would expect global growth to maybe drop by .3 percentage points. So instead of
>> Exactly. by
>> so far as of as of a month plus of the shutdown, that's what we're seeing
>> as of now. Exactly.
>> And is that snowball in size or is it sort of same level of impact every additional month of of shutdown?
>> It can change dramatically depending upon how much of the energy infrastructure is damaged such that it takes many more years for to bring back that energy onto the market. And so far there has been damage to Qatar's LG 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 up 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 serious damaged energy infrastructure.
>> Let's say in a relatively mild scenario where you after 2 to 3 months of almost complete shutdown of the straight, it starts to reopen. Um, and there isn't any dramatic additional damage the way we've seen with Cuttery LG. 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 we're talking about exactly maybe to 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.
>> Yes.
>> Interesting.
>> 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 sign 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?
>> 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 a 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.
>> Over a year. Wow. Okay.
>> 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 households' incomes. 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 consequences, of course, is fertilizers and that comes with a lag because there's always this gap between when you sow and when you you reap.
>> Uh, 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 uh, 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 of Sri Lanka is a country that could have been, you know, 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 already in trouble of some kind and who are energy importers for whom this is a major trouble unlike 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 that the price is consequential, but the bigger problem is you just don't have LPG which is used for cooking, uh, and therefore restaurants have to shut down because there's not enough uh, gas lenders 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 you live in the Middle East itself.
>> of course
>> it's Asia, uh, absolutely.
>> and subsaharan Africa just in terms of the challenges of food.
>> Subsaharan Africa gets hit because the cost of all these inputs are going up. The cost of food will 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 subsaharan Africa.
>> Now, President Trump has said that because uh, 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 uh, by this this Iran conflict. Inflation does go up and this is why I gave you the number of about how you can shave off about $600 from the average
>> income
>> 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 bet, a kind of a a ballpark, the effect on the world economy is around shaving off of about .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 um, the ability of a 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 postcarbon 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 won 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 in 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 invasion happened, 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 or 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, uh, is in fact the, I would say, the most consequential and what will probably carry on for 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, 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. It's 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. [music]
You're listening to the GZERO World with Ian Bremer podcast, your weekly geopolitical deep dive into the world's biggest news stories, featuring in-depth conversations with global leaders and newsmakers. To get more of GZO's insights on global politics every morning, sign up for our free newsletter, GZO Daily, at gzeromedia.com. [music]
>> 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 um, the way that global economies had been interdependent?
>> So what we are certainly seeing around the world is 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 has is beginning to rewire trade flows.
Uh, and it's changing slowly over the last seven years. Actually, you 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 and an efficient trading system.
>> Are there efficiencies to be gained though in the sense that the the 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, '90s, '00s?
>> 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 Russia invasion 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 does, 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 much 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 straight or the United States continuing the war for another 1, 2, 3 months. Which of those concerns you more economically and why?
>> In the near term, in the terms of the next three to four to five years, what would concern me, of course, is that if this war escalates and we have much bigger structural damage to energy infrastructure in the Middle East, because of which we're now living with $120 of of price of a barrel of oil, the consequences of that are very very large. Now, if you said that if we didn't do this and we were not pushing this war forward, that means that we have a risk from the long-term perspective that actually Iran builds up a nuclear weapon and threatens the whole world and holds the whole world hostage to it. Obviously, that's a different frame.
>> But I wasn't saying that because again, you can mow that lawn, you see it, you blow that up, 12-day war, not such an economic risk. Bigger question is you leave the Iranians there, they suddenly have a toll booth. They have the ability to let friends through. Uh, they're charging for the privilege enemies they're not letting through. Is is that something from it sounds like economically you'd rather have that world?
>> No. Firstly, I do not believe that those are the choices.
>> Now, we we'll see how that plays out.
>> I don't think that Iran can see itself in the middle of all those other countries deciding that it's going to be a pariah and it's going to start charging a toll for all the ships that go through the straight of Hormuz and it's going to be able to implement that in a viable manner. So I I don't think that those are the choices. I I do believe that if this country wants to survive, which it does want to and exist for another thousand years, it will need some sort of source of revenue. It has to live in the region, uh, and it will negotiate. So I suspect that there is still that
>> middle ground that middle ground forward.
>> So, uh, I want to turn now to an issue that's close to both of our hearts, which is the impact of AI on the global economy. I'm wondering, uh, how much do you see AI already making an impact on productivity and growth and where
>> AI is definitely having an effect on growth.
>> The US has benefited from AI for growth mainly because of all the investment that's happening around it and also because of all the stock market price increases that have gone up, wealth that has gone up and the consumption that's gone up along with that.
>> this is the B, this is the building of all of the data centers and all the compute and everything else so the bet is to come but the investment is happening
>> The investment is very large. The positive effect that came from AI and I offset the negative effect that came from tariffs for the US economy last year.
>> Equivalent.
>> Almost equivalent.
>> Almost equivalent. How interesting.
>> Yes.
>> So that's one of the reasons why nothing changed even though we had such massive massive tariff increases. There's a separate question of how much is this now affecting US productivity. Firstly, US productivity has done is doing really well for the last three years. Not just this is not just just a this year phenomenon or last year phenomenon. For the last three years, we've seen labor productivity has picked up quite substantially. Now, what exactly is driving
>> pandemic lag or it?
>> So, initially there was a sense it was a pandemic lag, but it's now too
>> too much too much to to explain just from a pandemic lag.
>> There seems to be a greater amount of dynamism in the US economy. If you just look at terms of firm creation, labor mobility until this past year, you saw at least firm creation has been, uh, you know, resurgent in the US and that's one source of increasing productivity. Now AI is being used whether that is truly responsible for any of the increase in productivity that we've seen so far. I think the jury is still out on that because if you look at enterprises and enterprise adoption and actually find figuring out a way to how to make profits from it and how to increase productivity, those are still early days, uh, in the US. Now this year that could change. We could see an effect on productivity that's much stronger. So to your the answer to your question is there is some, there is anecdotal evidence, there are some sectors where you've seen AI boosting productivity, but from an economywide perspective, there's still really not that much of a smoking gun evidence that is raising productivity.
>> And the sectors that you're seeing that evidence, if you were going to make a bet and say, you know what, this feels like it's going to be real, you'd say, what and why?
>> The sector, I mean, the software, so studies that have been done looked at, you know, for example, call center workers and asked and gave them a a bot that can help them AI bot that can help them respond to customers and you've seen evidence that that's raised their productivity quite substantially, right? So in different kinds of software companies we have seen some evidence of this positive effect but not at a more sectoral even for the tech sector as a whole it's hard to say whether this is playing an important role right now. What's certainly happening is investment is going up and because of the investment and going up and because of the capital deepening that in and of itself will raise labor productivity to some extent.
>> but use cases with real economic impact at the macro level so far GA does not see it.
>> limited
>> limited
>> and and to the extent that it's anywhere is it in the US or is it more in the countries that actually have lower priced knowledge workers?
>> It's again, these are early days in terms of what the data can tell us about how what the effect is. You know, the real other competitor in terms of AI is China. One interesting difference between China and the US is that China seems to be very focused on applications of industrial use and industrial use and enterprise adoption. So, they're moving much faster on that while the US is a lot more on the foundational model still.
>> Uh, but again, it's not as if you're seeing the kind of rapid increases in productivity growth that we think may come from AI. I think it's still early days.
>> and if you think about the impact of all of these data centers and I see the concerns about energy usage and water usage at a time that the Middle East is suddenly increasing those prices. Are we going to start seeing real fights between tech companies and consumers agricultural needs? Are you seeing that playing out yet?
>> I think that will certainly be an issue and I think that could be even an issue as soon as this midterms, uh, for are you, you know, are you a politician who supports AI the way it is and do you support data centers versus are you somebody who thinks that no, we need to regulate AI more, we can't have electricity bills going up because of AI water consumption. We will see some push back on AI investment I suspect relatively soon.
>> that is merited by actual costs in the economy or just concerns about things to come?
>> The communities that are directly affected by data centers showing up, they don't like it. They're concerned about living in an close to a data center and so on. The impact on electricity prices again varies across different, uh, different states. It's not a national issue at this moment, but it certainly is a local issue where the data centers are coming up.
>> Is there more of a concern about a bubble in all of this investment given the enormous shock that is presently going on coming out of the Middle East?
>> 2025, I would say pre October 2025 was when the overvaluation seemed really excessive. Then everybody said, okay, well, maybe there is this is excessive and you've seen some rebalancing away also from the US in terms of investing in other parts of the world. AI there's a lot more question marks associated with it. I think the question that we still don't have a good answer to is how will all these countries that at the front companies that are supercharging the AI revolution, how will they recover the very large amounts of investment in terms of trillions of dollars that they're making. Right? The reason this question is there is because what is their profit-making model?
>> You could have another deepsek like company that shows up and says at a fraction of the price I can provide you pretty much the same product and I can charge you very little for it.
>> And then those companies in trouble.
>> Exactly. And it's still unclear how they're going to be able to ring fence that profits. And that's where I, that's why I still have a question mark.
>> Final question for you, topic for you, which is I see that the Chinese are talking more about moving away from uh, their dollar exposure more towards a basket of currencies. They come to this topic frequently in a cyclical way. Is it more real this time? Is it something we should pay more attention to this time?
>> We should pay attention to it to the extent that I don't think people know know that if you look at China 10 years ago and how much it used its own currency in terms of transactions with the rest of the world, that was about close to 0%.
>> It was overwhelmingly the dollar.
>> And now that number is 50%. So when China deals with the rest of the world for that entire basket of transactions, 50% is now renminbi and 50% is dollar. That's happened over a 10-year period. It's taken time but this has been conscious effort by China to internationalize the renminbi. How far can they get with this approach? The constraints are because firstly they still don't have a currency that's as freely convertible. They don't have deep uh, you know,
>> financial markets
>> red maybe financial markets.
>> They don't have that unlike the US and that puts natural constraints on how much they can do. But I think, and I'm becoming a little increasingly more worried about this point that we started out with, which is on structural damage and the changing economic relations in the world. I don't know if you know this, Ian, but if you look at direct trade between US and China's share in US imports now is back down to what it was before China entered the WTO 2001, 9%. It used to be at 22% just about 7 years ago.
>> Now, of course, China has figured other ways of producing other countries, but but it's not all coming. It's not all trans. It's definitely not all trans shipment,
>> but it's selling to other parts of the world.
>> Other countries are becoming part of the supply chain. The [snorts] reason I mentioned that is because at one level we see that these networks are tough. You know, it's not easy to get out of China and build everywhere else. It doesn't happen. It's going to be costly. It's going to take a lot of time. But I think it's helpful to keep in mind that seven years was all it took. And therefore, these all of these shifts that we're seeing right now with the relationship between the US and Europe, between China and the rest of the world, we could see ourselves in seven to eight years in a in a very changed world. And if that were to continue, uh, would you suddenly think of the dollar as having a challenge as a global reserve currency from the R&B?
>> We could see definitely a more definitely more chipping away at the edges for sure. We've already seen that with Russia and China happening. Um, it's again, it's not absolutely obvious how you could simply move away from the dollar given the constraints. Now maybe China will figure out a way to make the currencies much more convertible and develop its financial markets even more in which case there would be more options for uh, other countries in the world. Not 100%. I I can't tell you the my prior is that it's going to be very hard, but at the same time I want to have the humility that a lot can happen in in a few years, which is what we
>> because if you and I had had this conversation seven years ago you're saying you'd be surprised with where we are today?
>> Absolutely. Absolutely.
>> Gita Goponath, so good to see you.
>> Thank you. Thanks, Ian. [music]
>> That's it for today's edition of the GZERO World podcast. Why not make it official? Why don't you rate and review GZERO World? Five stars. Only five stars. Otherwise, don't do it on Apple, Spotify, or wherever [music] you get your podcast. Tell your friends. [music]
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