$5.7 trillion threat: How global fragmentation could hit India and emerging economies hard

Countries are increasingly weaponizing financial and trade systems to pursue geopolitical goals, triggering a level of global economic fragmentation that could slash global GDP by as much as $5.7 trillion, or 5%, in a worst-case scenario. A new report from the World Economic Forum warns that the fallout from such fragmentation could exceed the damage caused by the 2008 financial crisis or the COVID-19 pandemic.

The Navigating Global Financial System Fragmentation report, developed in collaboration with Oliver Wyman, highlights how rising use of sanctions, industrial policies, and export controls is reshaping global trade and capital flows. It points to a 370% surge in sanctions since 2017 as evidence of the increasing use of economic statecraft.

“The potential costs of fragmentation on the global economy are staggering,” said Matthew Blake, Head of the World Economic Forum’s Centre for Financial and Monetary Systems.

In the most extreme scenario, a complete decoupling between Eastern and Western blocs could cause global GDP to shrink by up to 5% and inflation to rise by over 5%. Emerging markets like India, Brazil, and Türkiye, along with nations in Africa and Southeast Asia, would bear the brunt of the economic burden, facing GDP losses of over 10% due to their dependence on an integrated global financial system.

Economic fragmentation also threatens to destabilize inflation rates, as limited trade and capital flows disrupt supply chains and global efficiencies. “Fragmentation not only fuels inflation but also negatively impacts economic growth prospects, particularly in developing economies,” said Matt Strahan, Private Markets Lead at the Forum.

The report calls for policymakers to adopt measures that protect national security and sovereignty without jeopardizing global prosperity. It outlines eight principles to safeguard the financial system, including respecting the rule of law, protecting property ownership rights, ensuring system interoperability, and avoiding unilateral asset expropriation.

“Economic statecraft measures such as sanctions and tariffs must be carefully designed to avoid unintended shocks to the global economy,” said Daniel Tannebaum, Partner at Oliver Wyman. The report emphasizes the need for a governing framework that modernizes the financial system to reflect current geopolitical realities while reducing costs to global prosperity.