The global economy is entering a new era, with globalisation giving way to geo-economic fragmentation. The shift could come at a steep cost, with the World Economic Forum (WEF) warning that a full economic decoupling between the East and the West could wipe out as much as $6.9 trillion from global GDP in 2025-26. The report said that the cost of fragmentation is already becoming visible. Existing trade and financial policies are reducing global gross domestic product (GDP) growth by between $213 billion and $307 billion while adding 0.2-0.3 percentage points (pp) to inflation. According to WEF, “an increasingly likely escalation could raise the economic cost to $6.9 trillion,” with emerging markets and developing economies (EMDEs) expected to face the greatest impact because of reduced access to capital.It further threw light on growing policy uncertainty across countries. “In 2025 and 2026, severe swings in policy and enforcement by countries reduced certainty and affected decisions on investing and hiring,” it noted. It added that governments are increasingly introducing unexpected trade and financial barriers, creating fresh risks for businesses and economies.According to WEF, the United States attempted to reshape global trade and financial system through tariffs and other restrictions, particularly against China. Meanwhile Beijing responded by using its dominance in critical minerals supply chains and redirecting exports, a move that helped it record its highest trade surplus in 2025. Additionally, the US also expanded the tariff war to allied countries, prompting retaliatory measures and encouraging countries to diversify their geo-economic partnerships.The report said rising nationalism, geopolitical tensions and declining institutional legitimacy have weakened the role 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 increase risks to financial stability.WEF also warned that governments are placing growing pressure on central bank independence by attempting to influence monetary policy through rhetoric and policy actions.The report estimates that the impact of current trade and financial policies differs across economies. “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.Looking ahead, WEF cautioned that governments could increasingly use control over key economic chokepoints as a strategic tool, further deepening global fragmentation. “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.The report also pointed to the sharp escalation in the 2025 US-China trade conflict, during which tariffs briefly exceeded 100%, and said the global economy needs to prepare for more extreme scenarios.
