Rising Geo-Economic Fragmentation Threatens Global GDP

January 24, 2025

The World Economic Forum recently released the Navigating Global Financial System Fragmentation report. It revealed that geo-economic fragmentation could drastically diminish global GDP. This potential impact is set to eclipse the economic fallout from both the 2008 financial crisis and the COVID-19 pandemic. Emerging markets, particularly nations like India, are poised to shoulder economic burdens as geopolitical tensions escalate.

About Geo-Economic Fragmentation

Geo-economic fragmentation refers to the division of the global economy into separate, often hostile, blocs.
This trend is driven by countries employing financial measures to achieve geopolitical goals.
Examples include sanctions, trade barriers, and industrial policies. Such actions disrupt established trade relations and reduce cross-border capital flows.

Economic Implications of Fragmentation

Geo-economic fragmentation could cost the global economy between USD 0.6 trillion and USD 5.7 trillion. This represents up to 5% of global GDP.
The economic fallout includes reduced trade efficiency and hampered investment flows.
Additionally, inflation rates could surge by more than 5% in extreme scenarios.

The Role of Sanctions and Statecraft

Since 2017, there has been a staggering 370% increase in the use of sanctions. Countries are increasingly leveraging the financial system to pursue national interests. This shift is evident in the rise of subsidies and discussions around creating alternative financial systems. Such strategies complicate international trade and investment landscapes.

Impact on Emerging Markets

Emerging economies are particularly vulnerable to the effects of geo-economic fragmentation. Nations like India, Brazil, and Turkiye could see GDP declines exceeding 10% in severe fragmentation scenarios. These countries rely heavily on an integrated financial system for growth, making them susceptible to economic shocks.

Inflationary Pressures

Fragmentation is not just a threat to GDP; it also fuels inflation. Increased costs of trade and reduced competition can lead to higher prices for consumers. Emerging markets, which often have less economic resilience, may experience the most severe inflationary impacts. This could exacerbate living costs and hinder economic development.

Policy Recommendations for Mitigation

The WEF report urges policymakers to adopt strategies that promote cooperation and sustainable development. A principled approach to economic statecraft can help mitigate the adverse effects of fragmentation. By encouraging resilience in the global economy, leaders can better navigate the challenges posed by geopolitical tensions.

Future Scenarios and Economic Decoupling

In a scenario of complete economic decoupling between Eastern and Western blocs, nations not aligned with either side may be forced to trade exclusively with their largest economic partner. This could lead to economic isolation and further declines in GDP growth for these countries.

« Previous Post