New Report Warns of Economic Risks from Global Financial System Fragmentation

The Navigating Global Financial System Fragmentation report, developed in collaboration with Oliver Wyman, examines how the increasing use of sanctions, industrial policies, and export controls is reshaping global trade and capital flows. The report highlights a 370% increase in sanctions since 2017 as a clear indication of the growing reliance on economic statecraft.

Matthew Blake, Head of the World Economic Forum’s Centre for Financial and Monetary Systems, stated that the potential economic costs of fragmentation could be immense. According to the report, in the most extreme scenario, a complete decoupling between Eastern and Western economic blocs could lead to a reduction in global GDP of up to 5%, accompanied by an inflation surge of over 5%. The analysis suggests that emerging economies such as India, Brazil, and Türkiye, along with several African and Southeast Asian nations, would be most affected, potentially experiencing GDP losses exceeding 10% due to their heavy reliance on an integrated global financial system.

Economic fragmentation is also expected to create inflationary pressures by limiting trade and capital flows, which in turn could disrupt supply chains and reduce global efficiency. Matt Strahan, Private Markets Lead at the Forum, noted that fragmentation not only drives inflation but also negatively affects economic growth prospects, especially in developing regions.

The report urges policymakers to implement strategies that safeguard national security and sovereignty without compromising global economic stability. It presents eight core principles designed to protect the financial system, including adherence to the rule of law, preservation of property ownership rights, ensuring system interoperability, and avoiding unilateral asset expropriation.

Daniel Tannebaum, Partner at Oliver Wyman, pointed out that economic statecraft measures such as sanctions and tariffs must be carefully crafted to prevent unintended disruptions to the global economy. The report underscores the need for a modernized financial framework that accounts for evolving geopolitical realities while minimizing adverse impacts on global prosperity.

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