The International Monetary Fund (IMF) has warned that a severe fragmentation of the global economy could result in a reduction of global economic output by up to 7%, with potential losses reaching as high as 8-12% in some countries, if technology is also decoupled. This warning comes in a new staff report from the IMF.
The IMF said even limited fragmentation could shave 0.2% off of global GDP, but said more work was needed to assess the estimated costs to the international monetary system and the global financial safety net (GFSN).
Fragmentation in Global Economy
“Fragmentation” refers to the division or separation of a larger entity into smaller parts or pieces. In the context of the global economy, it refers to the splintering of economic activity and trade into smaller, more localized or regional markets. This can occur due to a variety of factors such as trade barriers, political tensions, or a shift towards protectionism.
When fragmentation occurs in the global economy, it can have negative consequences for economic growth and development. This report suggests that fragmentation could cost the global economy up to 7% of GDP. This means that the global economy would lose out on up to 7% of its total economic output as a result of fragmentation. This can occur due to a decrease in trade and investment flows, as well as a decrease in efficiency and productivity as a result of increased barriers to doing business across borders. This can also lead to job losses and a decrease in living standards.
GDP stands for Gross Domestic Product. It is a measure of the economic activity in a country or region. For its calculation, they add up the value of all goods and services produced within a certain period of time, usually a year. GDP is often used as an indicator of a country’s economic health and is often compared to other countries’ GDPs to measure relative economic performance. In this context, “Fragmentation could cost global economy up to 7% of GDP” suggests that the fragmentation of the global economy could lead to a loss of up to 7% of the total value of all goods and services produced globally. This loss could have significant negative impacts on the global economy.
The note, released late Sunday, noted that the global flows of goods and capital had leveled off after the global financial crisis of 2008-2009, and a surge in trade restrictions seen in subsequent years.\
“The COVID-19 pandemic and Russia’s invasion of Ukraine have further tested international relations and increased skepticism about the benefits of globalization,” the staff report said.
It said deepening trade ties had resulted in a large reduction in global poverty for years, while benefiting low-income consumers in advanced economies through lower prices.
It also said that the unraveling of trade links would most adversely impact low-income countries and less well-off consumers in advanced economies.
Restrictions on cross-border migration would deprive host economies of valuable skills while reducing remittances in migrant-sending economies. Reduced capital flows would reduce foreign direct investment, while a decline in international cooperation would pose risks to provision of vital global public goods.
The IMF said existing studies suggested that the deeper the fragmentation, the deeper the costs, with technological decoupling significantly amplifying losses from trade restrictions.
It further noted that emerging market economies and low-income countries are likely to be most at risk as the global economy shifted to more “financial regionalization” and a fragmented global payment system.
“With less international risk-sharing, (global economic fragmentation) could lead to higher macroeconomic volatility, more severe crises, and greater pressures on national buffers,” the report said.
This could also weaken the ability of the global community to support countries in crisis and complicate the resolution of future sovereign debt crises.
As mentioned above, IMF warns of global economic fragmentation risks. Restrictions on trade and migration harm low-income countries and consumers. Costs amplify with technological decoupling. Emerging markets and low-income countries at risk. Fragmentation could lead to higher macroeconomic volatility and weaker ability to support crisis-hit nations.