IMF says fragmentation of the global economy will reduce global GDP by up to 7%

The International Monetary Fund (IMF) has released a new staff report saying that fragmentation of the global economy could decline the global economic output by up to 7%. The institution has also warned that these losses could range between 8% and 12% in some countries.

IMF warns of a possible decline in global GDP by up to 7%

The IMF warned that the up to 7% decline in GDP would result from severe fragmentation. However, there are also risks with limited fragmentation, with the institution warning that this will cause a 0.2% drop in the global GDP.

The IMF added that more studies were needed to determine the estimated costs within the international monetary system and the global financial safety net. It noted that the global movement of goods and capital had recovered after the global financial crisis of between 2008 and 2009.

Nevertheless, the macroeconomic environment was still unstable because of the COVID pandemic and the invasion of Russia by Ukraine. These events have tested international relations, and there has also been increased skepticism about the benefits realized from globalization.

Unraveling trade ties pose a danger to high-income and low-income countries

In previous years, trade ties deepened, leading to a significant drop in global poverty levels. Better trade relations also benefited low-income consumers within advanced economies because of a price drop.

Therefore, if these trade ties unraveled, they would adversely affect low-income countries and consumers in advanced economies. The effects would also be detrimental to both poor and rich countries.

If advanced economies restricted cross-border migration, it would result in the host economies losing access to valuable skills. On the other hand, the move would reduce the remittances in migrant-sending economies.

A reduction in capital flows would also drop foreign direct investment, while a drop in global cooperation posed a risk to the provision of crucial global public goods. According to the IMF, studies have revealed that the more severe the fragmentation, the higher the costs. Technological decoupling also amplified the losses accrued from trade restrictions.

The institution further warned that the economies of emerging markets and low-income countries were at risk if a fragmented global payment system was implemented and the economy shifted towards “financial regionalization.”

A reduction in global risk sharing is expected to trigger macroeconomic volatility, cause more harm, and add pressure to the national buffers. Additionally, the move would weaken the global community’s ability to support the countries facing a crisis. This could complicate how these countries resolve the sovereign debt crisis in the future.