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As 2025-26 marks a turning point from globalization to geo-economic fragmentation, a full East-West economic decoupling could cost the global economy up to USD 6.9 trillion in GDP, according to a report by the World Economic Forum (WEF).
As per WEF, "an increasingly likely escalation could raise the economic cost to USD 6.9 trillion," which could severely impact emerging markets and developing economies (EMDEs) due to reduced access to capital. The report notes that fragmentation is already reducing gross domestic product (GDP) growth by between USD 213 billion and USD 307 billion while pushing inflation by 0.2-0.3 percentage points (pp). At the same time, countries are increasingly adopting unexpected trade and financial barriers, amplifying risks for businesses and economies worldwide. It further noted that the US has sought to reshape the global trade and financial system through tariffs and other restrictions, particularly targeting China. Beijing retaliated by leveraging its dominance in critical minerals supply chains and redirecting exports, helping it post a record trade surplus in 2025. Washington also extended tariffs and restrictions to allied countries, prompting retaliation and efforts to diversify geo-economic partnerships. "In 2025 and 2026, severe swings in policy and enforcement by countries reduced certainty and affected decisions on investing and hiring," the report noted. According to WEF, rising nationalism, geopolitical tensions and declining institutional legitimacy have weakened the effectiveness of multilateral institutions such as the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). With the WTO's dispute-settlement role diminished, countries are increasingly relying on bilateral agreements and local currency settlements, a shift that could reduce economic efficiency and heighten financial stability risks. The report also warns that pressure on central bank independence is increasing as governments attempt to influence monetary policy through rhetoric and policy actions. The WEF estimates that existing trade and financial policies are already slowing growth and raising inflation, although the impact differs across economies. For example, "US output growth is expected to be 0.4-0.6 pp lower than projected, whereas some Neutral countries are less affected, including Indonesia, with a projected 0.1 pp hit to output growth," it said. The report further cautions that governments may increasingly weaponize control over key economic chokepoints. It warns that further economic fragmentation would weaken growth and fuel inflation across all regions. "In the worst-case scenario, economic growth could fall by up to 6.4 percentage points, while inflation could rise by as much as 6.1 percentage points," it said. Furthermore, highlighting the sharp escalation of the 2025 US-China trade conflict, which briefly saw tariffs exceed 100 per cent, WEF stressed the world economy needs to prepare for extreme scenarios. (ANI)
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