DATA STORY
Growth at a crossroads:
measuring the cost of financial fragmentation
Growth at a crossroads: measuring the cost of financial fragmentation is an Economist Enterprise research initiative, supported by Swift. It explores the future of financial fragmentation and its impacts on the global economy, drawing on an economic modelling study and expert insights.
At the centre of growing global divides is financial fragmentation—a decline in international financial integration marked by disruptions in cross-border payments, credit and investment. As these channels tighten, capital flows shrink, sending ripples through economies and amplifying uncertainty.
The 2008-09 global financial crisis was a key turning point, leaving deep scars and triggering a retreat from financial openness. Cross-border portfolio investments, bank lending and foreign direct investment (FDI) have not recovered since. While the crisis began to reverse years of progress, the shocks of the past half-decade have accelerated the decline. The slow unravelling of global financial integration is now gaining pace.
Global FDI flows are in decline
FDI flows as a % of global GDP
4FDI flows dropped from 3.3% of global GDP in the early 2000s to just 1.3% between 2018 and 2022.
Our analysis delves into the key drivers likely to fuel fragmentation in the short to medium term, outlining three potential scenarios for the future.
Drivers of fragmentation
TECHNOLOGICAL DECOUPLING
TRADE WARS
ECONOMIC PROTECTIONISM
FINANCIAL SYSTEM RECONFIGURATION
In each of the three future scenarios of differing levels of fragmentation, GDP and jobs would be much lower compared with the current 2030 forecast set out by The Economist Intelligence Unit.
Our estimates suggest that global GDP could be up to 6% below baseline forecasts in 2030, amounting to a loss of US$6.5 trn—more than double the current economic output of the entire African continent.
The cost of fragmentation
Global GDP in 2030
Divergence from EIU baseline forecasts
The global economy could also be short of nearly
280m jobs
In the new normal and escalation scenarios, roughly 133 million and 280 million jobs would not materialise. Even in the mitigation scenario, 65 million jobs would not be created in 2030.
Employment fallout
Employment in 2030
Divergence from EIU baseline forecasts
Beyond the global impacts, our analysis of 17 key regional economies shows that no country escapes unscathed from fragmentation. At best, some nations face minor setbacks, while the hardest-hit will suffer significantly.
There are no winners
Country-level GDP impacts under the new normal scenario
National outcomes vary depending on each country's ability to absorb shocks and boost domestic investment. Developed economies can often rely on public spending and consumption to drive growth, while middle-income nations are more vulnerable due to their greater dependence on foreign investment flows. That said, there are always outliers and exceptions to this trend.
Labour markets worldwide suffer the effects of fragmentation.
Less job opportunities materialise than would otherwise be the case, and some jobs might disappear entirely.
Middle-income countries reliant on foreign investment will face the hardest-hit labour markets.
To mitigate the impacts of fragmentation, effective strategies are essential.
Regulators and policymakers
Incentivise interoperability between different digital financial service providers
Strengthen international collaboration and establish technical standards for seamless integration
Promote the development of shared infrastructure
Financial Institutions
Enhance their risk management practices
Strengthen capital and liquidity buffers, especially in emerging markets and developing economies
Diversifying funding sources can increase the resilience of individual institutions and the overall financial system
International Organisations
Promote open markets to improve competition and keep financial services affordable
Facilitate cross-border co-operation by encouraging regulatory reliance and recognition between jurisdictions
Technology Providers
Incentivise interoperability between different digital financial service providers
Read the executive summary
Take a look at the overview of the report in the executive summary that outlines what could be lost due to fragmentation and some future scenarios of differing levels of fragmentation.
Growth at a crossroads: measuring the cost of financial fragmentation
Financial fragmentation is gaining momentum, threatening global economic growth and millions of jobs. This report unpacks the driving forces, explores possible scenarios and reveals the staggering economic costs at stake.