Global economic fragmentation spreads to allies, costing up to $307 billion annually: WEF report
New Delhi, June 4
Geoeconomic fragmentation has reached a critical turning point, accelerating through 2025 and 2026 to spread beyond geopolitical rivals and infect traditionally allied economies.
According to a new World Economic Forum (WEF) report titled Deepening Divides: The Cost of a More Fragmented Financial System, released on Thursday in collaboration with Oliver Wyman, the widening structural shift is already imposing a massive toll on the global financial architecture.
The report warned that escalating tariffs, investment restrictions, and retaliatory measures are now actively raising costs and dismantling predictability for businesses within the US, the EU, Canada, Japan, and South Korea.
"Emerging markets and developing economies (EMDEs) are likely to be the hardest hit by the impacts of growing financial fragmentation. In the most extreme fragmentation scenario, countries outside the major geopolitical blocs, most of which are EMDEs, could face output losses of 10.7%, compared to a global decline of 6.4%," the report said.
"As fragmentation becomes more embedded across markets and financial systems and barriers rise even among allies, the risks of escalation and long-term economic disruption increase," the report added.
Fragmentation is already costing the global economy between $213 billion and $307 billion annually. Current fragmentation policies have added 0.2 to 0.3 percentage points to global inflation, steadily eroding consumer purchasing power.
In the United States, real wages are estimated to be lower by 0.33% for low-skilled workers, 0.49% for medium-skilled workers, and 0.66% for high-skilled workers. If current trends spiral into severe escalation, global output losses could hit $6.9 trillion--a staggering 6.4% hit to global GDP. This economic damage would eclipse the size of every individual economy in the world except the US and China, said the report.
Emerging markets and developing economies (EMDEs) face the sharpest exposure due to their shallower capital markets and reliance on international capital flows. In an extreme fragmentation scenario, unaligned nations outside the major geopolitical blocs face an estimated 10.7% hit to GDP growth, vastly outstripping the 6.4% global average.
The report highlighted Africa as a prime example of this vulnerability, where development financing is poised to become more expensive and unpredictable. However, the continent is also carving out pathways to resilience through regional initiatives like the African Continental Free Trade Area (AfCFTA) and the Pan-African Payment and Settlement System (PAPSS).
"In conversations with business leaders around the world, the message is remarkably consistent: What businesses need most right now is predictability, and they are not getting it. Without clearer guardrails around tariffs, sanctions and other economic measures, the risks to investment, growth and financial stability will continue to mount," said Daniel Tannebaum, Partner and Global Leader, Anti-Financial Crime Practice, Oliver Wyman.
While experts note that fragmentation is unlikely to reverse anytime soon, the WEF outlines five critical interventions to manage and mitigate the damage.
Protect the financial system by safeguarding the rule of law, ensuring independent monetary policy, limiting sovereign asset seizures, and protecting government data integrity. Agree on rules that allow countries to protect national security without completely undermining global economic growth. Maintain clear frameworks to sustain vital cross-border capital and investment flows.
It is also called to ensure cross-border payment and digital currency systems can still communicate, while preparing corporations for a fragmented operating environment and heavily supporting regional financial frameworks (like AfCFTA and PAPSS) and developing domestic capital networks, including the European Savings and Investments Union.
— ANI
Reader Comments
$307 billion is a staggering amount. And the report says EMDEs like India will be hardest hit. 😟 Our exporters are already struggling with rising tariffs and unpredictable trade policies. The government must focus on building stronger regional alliances - SAARC may be dormant but BIMSTEC and ASEAN partnerships are crucial. Also, we need better domestic capital markets.
What worries me most is the inflation impact - 0.2 to 0.3 percentage points added globally. In India, where we are already battling food inflation, this could push essentials beyond reach for many. 🤔 The govt needs to fast-track FTAs and diversify trade partners. Also, why is India not part of the AfCFTA conversations more actively? Africa could be our big opportunity.
The report highlights something crucial - developing nations are stuck between the US and China rivalry. But honestly, both are responsible for this mess. 🥴 India should focus on building its own supply chains and reducing import dependence. The PLI schemes are a good start but need better execution. And we need to push for reforms in multilateral institutions like IMF and World Bank.
As a businessman dealing with exports, I can tell you this fragmentation is real and painful. 😤 Shipping costs have gone up 40% since the new tariff regimes kicked in. The WEF recommendations about safeguarding rule of law are spot on - but who enforces them? When US and EU themselves are violating WTO norms, where do we go? India needs to take lead in creating alternative frameworks.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.