Davos 2026: Why the global economy is more fragile than it looks - Gita Gopinath | Exclusive

Gita Gopinath, Professor of Economics at Harvard University and former First Deputy Managing Director of the IMF, warned that the global economy is entering an unusually fragile phase, marked by fractures within the Western alliance, rather than just between geopolitical blocs.

“I think geo-economic fragmentation was expected, but not within the West,” Gopinath said in an exclusive interview with CNBC-TV18’s Shereen Bhan on the sidelines of the World Economic Forum 2026. “The US and Europe are turning against each other,” she said, calling this the biggest global economic story of 2026.

Trump, tariffs and a fractured West


Gopinath said uncertainty around the global economic order has deepened, with Donald Trump once again setting the agenda at Davos. “The Trump story is far from over, and tomorrow’s message could be very different. I believe President Trump has set the agenda at Davos, with the world watching every word,” she said.

Her comments echoed the broader political tone at the summit, where Canadian Prime Minister Mark Carney struck a chord in his widely discussed Davos address by warning that economic resilience cannot be built by turning inward.

He said, “We are in the midst of a rupture, not a transition,” adding that the long-standing assumptions of global governance have been challenged by recent trade, diplomacy and security shifts.

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Gopinath cautioned that a full-blown EU–US tariff confrontation would be far more damaging for markets than current tensions. Retaliation from Europe, she said, could trigger a sharp global market reaction, even as decoupling from the US remains unrealistic given the world’s deep exposure to American consumers, capital markets and financial assets.

What's shielding the world from the tariffs havoc?


Despite the political noise, Gopinath said the economic impact of tariffs has so far been far more muted than feared. While statutory US tariff rates are often cited at 24–25%, the effective tariff rate paid by US importers is closer to 14%, she said.

That gap, she explained, helps explain why tariffs have added only about 0.5–0.7 percentage points to US inflation so far. “They remain a headwind, but not a growth killer,” she noted.

According to Gopinath, a combination of AI-led investment, a stock market rally, and fiscal stimulus in the US, China and Germany has helped offset the drag from tariffs. Wealth effects from rising asset prices have also supported consumption, keeping expansionary forces broadly balanced against trade-related pressures.

US Fed's independence under pressure?


Gopinath raised serious concerns about political pressure on the US Federal Reserve, warning that recent actions send a chilling signal to policymakers globally.

“This isn’t really about Jay Powell, with his term ending in May,” she said, adding that criminal investigations linked to rate decisions are unlikely to stick, but the message they send is deeply troubling.

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“It signals that dissent could invite investigations and state pressure,” she said, describing the threat to central bank independence as the real risk. Strong pushback from global central bankers and even within the US Senate, including from Republicans, was welcome, she said, stressing that the stronger the resistance, the better the outcome.

She also pointed to an upcoming Supreme Court decision involving Fed Governor Lisa Cook as potentially pivotal, calling the pressure on the world’s most important central bank unprecedented.

Inflation risks lingers


Gopinath said the US economy remains in solid shape, driven by an AI-fuelled boom, resilient labour markets and strong household balance sheets. Tax incentives and earlier rate cuts continue to provide expansionary momentum, with markets pricing in two rate cuts this year.

However, risks remain. "Companies may no longer be able to absorb tariff costs into margins," Gopinath warned, adding that it raises the possibility of a higher inflation pass-through. While no one is pricing in rate hikes, concerns around Fed independence could push long-term yields higher, tightening financial conditions.

AI and valuations


While AI is clearly driving growth and productivity, Gopinath warned that the gains are highly concentrated, and monetising productivity improvements remains uncertain. Competition in AI is intense and global, spanning both listed companies and private players.

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“No single company yet has a revenue model that looks fully defensible,” she said, adding that valuations across both public and private AI firms are increasingly being questioned. A low-cost technological breakthrough that replicates AI capabilities at a fraction of today’s investment could leave large investors exposed, she cautioned.

The Harvard Professor drew parallels with the dot-com era, noting that the bubble burst after a 175-basis-point Fed rate hike, while acknowledging that timing a correction is notoriously difficult. Some excess froth, she said, was already squeezed out toward the end of 2025, with investors now far more selective and profitability replacing hype as the key driver of capital allocation.

Currencies, dollar dominance and gold


On currencies, Gopinath said the dollar’s dominance is likely to persist, even though its influence has "eroded" at the margins. “No fiat currency matches the depth of US financial markets,” she said, making a rapid shift away from the dollar extremely difficult.

Gold, she added, is increasingly emerging as an attractive hedge. Meanwhile, currency movements in emerging markets reflect a mix of fundamentals and delayed adjustments.

India: fast growth, harder reforms ahead


Gopinath said India remains the fastest-growing major economy globally and is on track to become the world’s third-largest economy by 2028. However, sustaining growth while raising per capita incomes remains the central challenge.

Public infrastructure, both physical and digital, has been transformative, and reforms have delivered results, she said. Yet job creation, land acquisition and judicial reforms remain unfinished priorities.

On the currency, she noted that recent weakness reflects delayed depreciation following earlier RBI intervention, with part of the 2025 move unwinding pressure held back in 2024. Equity valuations, she added, have long appeared stretched, though valuation stress was higher in 2024 than in 2025.