With the Federal Reserve keeping Interest rates higher for longer and ongoing, escalating geopolitical conflicts, questions around the potential for a global recession are arising. More than half of chief economists surveyed by the World Economic Forum say the global economy will slow down.

Kenneth Rogoff, Maurits C. Boas Chair of International Economics at Harvard University, joins Yahoo Finance's Julie Hyman and Brian Sozzi to give insight into the potential for a global recession, what it could look like, and the impact it may have on broader markets.

When asked about the potential of multiple interest rate cuts from the Fed, Rogoff affirms: "It sort of depends if you think we're going to have a recession or not. If you think we're going to have a recession, yes, but if we're just having a soft landing, absolutely not. I think in fact, I've been saying this to you for a while, the super low interest rates we saw particularly from 2012 through 2021, the real ten-year interest rate average is zero... Forget it. That's not coming back for a long time."

It's all part of Yahoo Finance's exclusive coverage from the World Economic Forum in Davos, Switzerland, where our team will speak to top decision-makers as well as preeminent leaders in business, finance, and politics about the world’s most pressing issues and priorities for the coming year.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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JULIE HYMAN: More than half of chief economists surveyed by the World Economic Forum say the global economy will slow this year. Of course, last year at this time here in Davos, the talk was much the same. And that recession, at least in the US, did not materialize. We were hearing a lot of optimism meantime from CEOs.

So let's talk about the risks to the global economy, whether, in fact, a recession is coming. Kenneth Rogoff, professor of economics and Boas chair of international economics at Harvard University. Ken, thank you so much for being here.

KENNETH ROGOFF: Thank you for having me.

JULIE HYMAN: So a lot of risks still out there. Recession coming or not coming?

KENNETH ROGOFF: Well, I mean, I think, you know, very uncertain, but I'd say 25% chance, in a normal year 15%. And this year, it's got to be higher than that just given that a few years have passed, given how strong the growth was, how high interest rates are. And I think it's worth bearing in mind the US has been a little bit of an island here. Europe had a good year because it only had a bad year and not a deep recession. China has been growing very slowly.

So it's not that global growth is so great, it's that the US did better than expected. But you know, chances are-- we're growing above trend, so chances are it's going to slow down. But you know, I wasn't-- I don't think I was in the camp when I spoke to you last of saying, oh, there's definitely going to be a recession. But I would have thought the odds at the beginning of last year were 50/50 that we would have had a recession.

BRIAN SOZZI: Do you think this is going to be a US economy that needs four to six interest rate cuts? This is what the market is pricing in now and I think it's shocking. It's surprising to see investors expect that rate of cuts.

KENNETH ROGOFF: Well, it sort of depends if you think we're going to have a recession or not. If you think we're going to have a recession, yes. But if we're just having a soft landing, absolutely not.

I think, in fact, I've been saying this to you for a while. The super low interest rates we saw, particularly from 2012 through 2021, the real 10-year interest rate average zero, the inflation index bond, forget it. I mean, that's not coming back for a long time. I don't know ever, but not for a long time.

If you look at a long history of interest rates, they have lots of these periods where they're high, they're low, and there's reversion to mean. It can take a while. And I think by and large that's what's happening.

Maybe the trend is slightly downward, but nothing like if you drew the last 40 years it goes like that. And anyone who is extrapolating that just had it wrong. So the inflation will come down, but interest rates aren't going to come down proportionately.

Now, that's just looking at time series statistic it's out of this structure. I hesitate to say exactly what it is because I've been critical of people who've been trying to explain why they're so low, the secular stagnation, never productivity demographic. But I do think I can point to some things.

I mean, one thing is global debt is really high. And the interest rate doesn't respond hugely to it, but it's grown a lot. Second, I can't imagine if we're looking at a long horizon, defense expenditures aren't going to go up worldwide a lot. I want to say in the United States, if they just went up 1%, that's less than I think they're going to end up going up. And that's partly because how much they're going up in other countries.

Green transition, which maybe nobody outside Davos thinks is happening, but probably will and that's going to be really expensive. Whoever wins in the US election or any of these many elections is probably going to be a populist with the only question if they're a right-wing or a left-wing populist, more redistribution, budget deficits. So I think there are a lot of forces suggesting interest rates aren't going to come down as much.

And again, if you look at the forecasts, probably a recession is more likely than a boom. So maybe that's partly built in to what those predictions are. I think if we have a soft landing maybe we'll get three cuts, something like that.

I think the Fed just doesn't know what it's looking for. It wants to find a path of interest rates, so that inflation is stable. They don't know what it is and they're going to feel it out.

JULIE HYMAN: Yeah.

BRIAN SOZZI: $34 trillion in total government debt, how concerned are you about that?

KENNETH ROGOFF: Well, I think everybody who works on it thinks that it's on an unsustainable trajectory. And this interest rate issue is a big part of the equation. If you believe, and there are many academics I respect who do, that interest rates are going to go back to what they were in the decade running through the pandemic or even lower, well, it's a free lunch. Modern monetary theory works. You can just do whatever you want.

On the other hand, if real interest rates are going to be more like 1.5% that we're paying on debt and if growth isn't wildly higher because of AI or something, it's not sustainable. And I don't think the politicians in Washington are remotely ready to confront this issue. Not just in Washington, really in a lot of the world.

JULIE HYMAN: They're happy to talk about it, but doing something about it is very different.

KENNETH ROGOFF: No, that's well part of it. I mean, I hear some of them in the Republican debates talk about it, but it's not clear what they say they're going to do about it.

JULIE HYMAN: If we are looking at a world of higher interest rates than we had become used to for quite some time, does that mean we are looking at a world, if not a recession, but sort of permanently lower growth or at least for the foreseeable future that we're just not going to be seeing the rates that we saw in the past?

KENNETH ROGOFF: Well, no. I mean, not necessarily. We've had great growth with much higher interest rates over a long period and many countries have. There are many things that feed into that.

I do think it makes the Fed's job harder. There are pressures over the next decade that are very different than we had during the globalization era. So deglobalization, who knows, but probably. Geopolitical risks, probably some of these things I mentioned like defense spending and such putting pressures on the Fed. And I should say other things like maybe rising unionization, monopoly power.

These may be perfectly good things, but they create more pressures on inflation. I have a couple very bright young coauthors, I've done some papers on this. And our thesis is that over the next decade, you're going to see more oops inflation was high than disinflation, we can't control it.

JULIE HYMAN: Well, that's not good news.

BRIAN SOZZI: Lastly, lastly, before we let you go, you mentioned AI. We just talked to Bill Gates and he said, AI may be a productivity driver for white collar workers. He also mentioned coders. I had a conversation with the managing director of the IMF said, AI might cause the need for more social safety nets to support displaced older workers. Where do you fall in this debate?

KENNETH ROGOFF: Well, the thing is everything's true and the question is the pace at which it plays out. I've been an optimist about AI forever in the sense that I thought it was coming from my days as a chess player and watching it. But what I would always say at the same time is I don't know if our society is ready for it.

And there are so many different ways. One is probably lots of jobs that are going to be lost at a very fast pace. There are questions like how it affects warfare, how it affects cyber warfare, how it affects things like social media and what we see in the elections. So it's a wild card in a lot of things.

Personally, I think we really screwed up on social media by not regulating it early and letting it take time to play out. I don't see what harm there would have been if it took another 5 or 10 years to get to some place even like where we are now. I think it's been-- I understand all the benefits. But on net, I think if you look at everything from our political dysfunction to mental health, it's been a negative.

And AI is 10x, 100x. So although I certainly don't consider myself ultra left wing, I kind of agree with progressives like my neighbor in Cambridge Elizabeth Warren on this that what's the harm in having more regulation and slowing it down? Not a popular opinion here, but that's the way I see it.

JULIE HYMAN: No, it's not from the folks we've talked to, but it is an interesting one. Ken Rogoff, thank you so much for--

KENNETH ROGOFF: Thank you.

JULIE HYMAN: --spending some time with us. Thank you.