IMF says Global economy may lose 7% of GDP

The International Monetary Fund (IMF) has released a new report that states that fragmentation in the global economy could cost up to 7% of GDP. The report highlights the various challenges that policymakers face today, and states that the long-term cost of trade fragmentation varies from 0.2% to almost 7% of global output, which is equivalent to the combined annual output of Germany and Japan. The report does not specify how long it would take for fragmentation to impact growth of this magnitude.

According to the IMF, there are several factors that are contributing to the increasing global fragmentation, such as political conflicts and the Covid-19 pandemic. These situations have led to disruptions in international financial, food and energy supplies, and have also led to additional trading restrictions between regions.

The report states that “policy interventions adopted in the name of economic or national security could have unintended consequences, or they could be used deliberately for economic gains at the expense of others.”

The IMF also notes that not all countries will be affected by fragmentation equally. Lower-income consumers in advanced economies may no longer have access to cheaper imported goods, leaving small, open-market economies particularly vulnerable. The report states that most of Asia would suffer due to its heavy reliance on open trade.

Additionally, emerging and developing economies would also cease to benefit from “technology spillovers” from more advanced economies, which in the past have helped to boost growth and living standards. “Instead of catching up to advanced economy income levels, the developing world could fall further behind,” the report says.

To tackle fragmentation, the IMF recommends three approaches: strengthening the international trade system, helping vulnerable countries to deal with debt, and stepping up climate action. These topics are likely to be discussed at the World Economic Forum in Davos, Switzerland, which starts on Monday and has named “cooperation in a fragmented world” as its theme.