By Indrani Chakraborty
Geoeconomic fragmentation imposing an annual cost of $213–$307 billion on the global economy, according to a new World Economic Forum report release on June 4. Driven by geopolitical tensions, economic security concerns and shifting trade relationships across major economies, fragmentation accelerated through 2025 and 2026 and is increasingly affecting trade, finance and investment systems.
The Cost of a More Fragmented Financial System — published in collaboration with Oliver Wyman, a Marsh business, and the second in the Forum’s fragmentation series — finds that these pressures are playing out through escalating tariffs, investment restrictions and retaliatory measures.
The report finds that the growing use of economic statecraft in 2025 and 2026 marked a turning point for global trade and finance. While the first report focused primarily on fragmentation risks between geopolitical rivals, the latest findings suggest a broader structural shift is underway. Tariffs and investment restrictions are increasingly affecting traditionally aligned economies, including the US, the EU, Canada, Japan and South Korea, raising costs for businesses and increasing uncertainty for cross-border trade and investment.
“The global financial system has faced increasing pressures from geopolitical and economic fragmentation,” says Matthew Blake, Managing Director and Head of the Centre for Financial and Monetary Systems World Economic Forum. “Despite these pressures, the financial system has remained resilient. Markets have continued to provide real-time feedback on evolving policies while policy-makers have generally avoided actions that could erode confidence in the international financial system. As fragmentation persists, preserving the trust and stability that underpin global finance will be critical to supporting long-term growth and prosperity.”
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. If current trends accelerate into more severe fragmentation scenarios, global losses could reach as much as $6.9 trillion, or 6.4% of global GDP, according to the report’s modelling, an economic impact larger than every economy in the world except the US and China.
Ultimately, fragmentation impacts both businesses and households. Current fragmentation policies are estimated to add 0.2–0.3 percentage points to global inflation, eroding purchasing power across most economies. The sharpest real wage impacts are seen in the United States, where real wages are estimated to be 0.33% lower for low-skilled workers, 0.49% lower for medium-skilled workers and 0.66% lower for high-skilled workers, with similar purchasing-power pressures visible in other major economies.
“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,” says Daniel Tannebaum, Partner and Global Leader, Anti-Financial Crime Practice, Oliver Wyman, a Marsh business. “Without clearer guardrails around tariffs, sanctions and other economic measures, the risks to investment, growth and financial stability will continue to mount.”
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%.
Structural factors like shallower capital markets make EMDEs more dependent on international capital flows and more vulnerable to the negative impacts of a less integrated financial system.
Africa exemplifies both the risks and potential resilience pathways. The continent’s exposure to external capital flows means a more fragmented system would make development financing more expensive and less predictable. At the same time, regional integration – through initiatives like the African Continental Free Trade Area (AfCFTA) and payment systems such as Pan-African Payment and Settlement System (PAPSS) – offers pathways to build resilience in Africa, which also stands to benefit from such secular trends as population growth and an abundance of critical raw materials.
While fragmentation is unlikely to reverse in the near term, it can be managed. The report identifies five actions policy-makers can take to mitigate fragmentation: Establish shared guardrails to protect the financial system from fragmentation, emphasizing principles like safeguarding the rule of law and independent monetary policy, limiting the seizure of sovereign assets, and protecting the integrity of government data.
According to the WEF report, in 2025 and 2026, the global policy environment shifted significantly, with finance, trade and economic policy becoming more intertwined. Countries not only raised barriers, but did so in unanticipated ways that have increased risks for firms and countries across the globe.
This period represents a turning point in the course of fragmentation, as the United States set out to fundamentally rewire the global financial and trade systems using tariffs and other measures. China was a major target of these efforts and retaliated, leveraging its control over critical minerals supply chains to force a détente and redirecting its exports to reach a record trade surplus in 2025. The US increased tariffs and enacted restrictions not only on geopolitical adversaries but also on allied countries, some of which responded by retaliating or by pushing for diversification in their geoeconomic partnerships.
These changes and others have further fragmented the global financial system by making it harder for firms to operate across borders and for capital to move freely. In addition to their current drag on economic growth, they sharply increase the likelihood of economically damaging escalation, the report says.
Challenges to long-recognized norms – such as central bank independence – as well as principles whose salience has only become clear in recent years – including the reliability of government data – emphasize the growing urgency to align on guardrails around the use of economic statecraft. As leaders seek to safeguard the security and resilience of their national economies, private-sector voices can articulate the importance of doing so in ways that minimize economic damage. The proposed Principles to Safeguard the Global Financial System from Fragmentation and the Rules of Engagement for Responsible Economic Statecraft articulated here can serve as a starting point for these efforts.
The WEF report mentions that the evolving geopolitical backdrop requires an understanding of how the economic costs of fragmentation have changed in 2025 and 2026. Accordingly, new quantitative analysis in this report incorporates updated assumptions to estimate that fragmentation is already reducing gross domestic product (GDP) growth by between $213 billion and $307 billion and raising inflation by 0.2–0.3 percentage points (pp).
The impact of existing policy varies by bloc: the costs are more substantial in the West, where growth is set to be reduced by 0.3–0.4 pp, than they are in the East or Neutrals, each with more modest reductions of approximately 0.1 pp, respectively. Further, the likelihood of scenarios in which fragmentation might escalate has increased over the same period. In a hypothetical worst-case scenario, a full economic decoupling between East and West, the negative impact to worldwide GDP could be up to $6.9 trillion.
Updated features of the analysis include both qualitative assessments of how the year’s fragmentation has impacted the global economy and quantitative measures of how such policies have affected markets around the world. It addresses new real-world considerations, including the impact of US tariffs on its allies, countermeasures by those allies against the US, updated tariff pass-through rates to consumers and restrictions on services trade that vary by industry.
Emerging markets and developing economies (EMDEs) are expected to experience the most severe impacts of fragmentation through reduced access to capital, which will reshape the realities, risks and opportunities facing policy-makers, businesses and households on the ground.
Insights drawn from interviews with African policy-makers and leaders of Africa’s large financial institutions illustrate that while recent developments exacerbate existing challenges, they also present an opportunity to pursue new avenues of growth and regional collaboration. The experience of navigating the geoeconomic turbulence of recent years offers valuable lessons for leaders across the world. (IPA Service)
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