Since January 2025, a raft of tariffs and trade and investment restrictions, as well as considerable geopolitical volatility, marked a turning point that left the global financial system and economy more fragmented than they have been in decades. Financial system fragmentation makes it harder for businesses to operate across borders and for capital to move freely, affecting both large and small countries alike.
These measures come at a cost. The quantitative analysis in this new World Economic Forum (WEF) report, Deepening Divides: The Cost of a More Fragmented Financial System, shows that these barriers are already set to reduce output in the global economy by close to $300 billion. Worldwide inflation will rise 0.2 to 0.3 percentage points over baseline inflation, according to the report — the second WEF collaboration with Oliver Wyman and NERA on financial system fragmentation.
The damage is greater in Western bloc nations. Economic output in the United States — which initiated tariffs 18 months ago that helped lead to a reshaping of the global trade and financial systems — is expected to be 0.4 to 0.6 percentage points lower than it would have been, even without further escalation.
These calculations do not include the economic disruption from the current hostilities involving the US, Israel, and Iran, which will amplify the negative impacts on both output and inflation globally. The closing of the Strait of Hormuz and other war-related disruptions have pushed crude oil prices to around $100 a barrel for most of the conflict. If they return to more normal levels after a few quarters, the report estimates that US inflation will be another one percentage point higher and output will be an additional 0.2 percentage point lower. If crude prices remain at close to $100 a barrel for longer than that, the effects could double. As of June 1, 2026, Brent crude was trading around $97 a barrel.
How global fragmentation could threaten the global economy
In a worst-case scenario for fragmentation — involving a breakdown of trade between the East, which includes China, and the West — global economic output could fall by as much as $6.9 trillion, or 6.4 percentage points, and inflation could rise by 6.1 percentage points. Because of ongoing tensions around the globe, the report concludes that the effects of fragmentation may continue to increase, although reaching the worst case is still considered unlikely.
Fragmentation is being driven by new policies that challenge the norms underpinning an integrated global trade and financial system, including the independence of central banks and domestic and multilateral rules that support financial stability. Some of the pressure to deviate is coming from a perceived need to protect domestic industries and increase domestic economic security. The increased sense of insecurity is, in part, a product of the disruption caused during the COVID-19 pandemic, which showed many nations the vulnerabilities in their supply chains. Attacks against the sovereignty of nations have also contributed, often disrupting trade channels and sometimes prompting countries to implement sanctions against violators.
Why a fragmented financial system puts Africa’s growth at risk
The global financial system — an interconnected network of financial institutions, markets, and instruments that facilitate the flow of capital within and across borders — has underpinned economic growth for more than half a century. In the five decades since the 1970s and the end of the gold standard-backed Bretton Woods system, economic integration has driven an unprecedented rise in prosperity, lifting swathes of humanity out of poverty. The share of people living in extreme poverty declined from about 48% of the world’s population in 1970 to 10% in 2015.
To illustrate the impact fragmentation can have, the WEF report took an in-depth look at the many emerging markets and developing economies (EMDEs) that make up Africa. While there will be pain in advanced economies, the impact of a fragmented global financial system can curtail growth and cause serious pain in EMDEs — some already struggling from the impact of tariffs and the ongoing hostilities in the Middle East and Ukraine.
Africa is home to five of the top 10 fastest-growing economies in the world and the youngest and fastest-growing population. This means that the demand for infrastructure and services is expanding at a rapid rate — making the need for capital to finance these expansions urgent.
Africa’s high concentration of small, open economies increases its exposure to changes in supply chains and investment flows, given that many African nations and other EMDEs tend to have shallow capital markets. This makes them reliant on foreign investment and volatile commodity exports — both of which become more unpredictable in a fragmented system that often increases the cost of capital and its availability and can put the brakes on economic development. Other EMDE characteristics include high debt, weak infrastructure and a paucity of data — which make their economies and populations more vulnerable in a fragmented financial system.
Fragmentation moved from plausible risk to economic reality demanding guardrails
The impact of fragmentation is already being felt around the globe — in both advanced economies and EMDEs. Current policies are expected to reduce global output and push inflation higher, and the possibility of further escalation has become more real.
There is a clear need for an executable agenda to guard against the worst potential outcomes of fragmentation. This second report from the World Economic Forum’s Navigating Global Financial System Fragmentation initiative reiterates important guardrails necessary to preserve a unified financial system and mitigate unintended economic damage — even as policymakers continue to pursue security and resilience objectives.
The report lays out two frameworks for leaders seeking to establish these guardrails: the Principles to Safeguard the Global Financial System from Fragmentation and the Rules of Engagement for Responsible Economic Statecraft. These principles and rules, which have been informed by input from dozens of financial sector leaders, can serve as a starting point for future efforts to operationalize guardrails in collaboration with policymakers.
