In 2025, the World Economic Forum (WEF) published “Navigating Global Financial System Fragmentation,” a flagship report addressing the economic risks of rising geopolitical and financial segmentation. NERA contributed a quantitative analysis to measure the potential macroeconomic impacts of increased geoeconomic fragmentation.

The analysis employs a multi-country, multi-sector input-output model based on the framework developed by Baqaee and Farhi (2024), calibrated with 2023 data for 40 countries and 30 industries. Fragmentation is modeled through direct shocks, such as tariffs, and indirect shocks, including productivity losses arising from increased financial frictions. The model quantifies the economic impact of geoeconomic fragmentation on GDP, inflation, and trade flows at the country level across a range of scenarios that vary by the degree of increased fragmentation across (blocs of) countries.

The analysis shows, in the short term, geoeconomic fragmentation can lead to global output losses ranging from 0.6% to 5.5%, along with inflation increases of up to 5.2 percentage points, depending on the severity of the fragmentation. Over time, adjustments in supply chains and cross-border financial flows tend to lessen the long-term impact on GDP, and inflationary pressures may even reverse as producers shift toward alternative international sources, helping to offset initial cost increases. For example, under a scenario of very high fragmentation, global GDP is estimated to decline by 4.2% in the longer term, less than the 5.5% short-run estimate. The analysis also found countries with a higher concentration of import-intensive sectors, which are more reliant on global supply chains, tend to suffer more from increased fragmentation.

The findings were presented at the 2025 WEF Annual Meeting in Davos.