Economic cost of fragmentation can exceed those 2008 financial crisis, COVID pandemic: WEF report

Davos, Jan 23 (PTI) Growing geo-economic fragmentation can decrease global GDP by up to USD 5.7 trillion, giving it a bigger blow than the financial crisis of 2008 or the COVID-19 pandemic, a new study showed on Thursday.

India and some other emerging economies can bear the biggest burden in the most extreme fragmentation scenario, it cautioned.

Countries are increasingly using the global financial and trading systems to advance geopolitical objectives through sanctions, industrial policies, and other economic measures, the World Economic Forum said while releasing the report here during its Annual Meeting 2025.

The Navigating Global Financial System Fragmentation report estimated that fragmentation resulting from statecraft policies could cost the global economy USD 0.6 trillion to USD 5.7 trillion – up to 5 per cent of global GDP – due to reduced trade and cross-border capital flows as well as lost economic efficiencies.

It could also increase global inflation by more than 5 per cent in a very high fragmentation scenario, it added.

The report, developed in collaboration with Oliver Wyman, showed that the economic impact of rising geo-economic fragmentation could surpass the disruptions caused by the 2008 financial crisis or the COVID-19 pandemic.

Countries have been increasingly using the financial system to advance their geopolitical objectives – evidenced by a 370 per cent rise in sanctions since 2017, along with subsidies, industrial policies and discussions about the creation of parallel financial architectures.

The report called on policy-makers to adopt economic statecraft that fosters cooperation, sustainable development and resilience in the global economy.

The impact of fragmentation on inflation rates and GDP growth depends heavily on the policies adopted by global leaders, WEF said.

With a principled approach, policymakers can advance appropriate policies for their economies and societies while mitigating unintended effects on areas like cost of living and GDP growth, it added.

In the most extreme fragmentation scenario, a full economic decoupling between Eastern and Western blocs would force unaligned countries to trade exclusively with their most significant economic partner, it cautioned.

These nations could see GDP growth drop by over 10 per cent – nearly double the global average – with India, Brazil, Turkiye, and emerging economies in Latin America, Africa and South-East Asia bearing the greatest burden.

“Fragmentation not only fuels inflation but also negatively impacts economic growth prospects, particularly in emerging markets and developing economies that depend on an integrated financial system for their continued development,” said Matt Strahan, Private Markets Lead, World Economic Forum.