Financial fragmentation is on the rise, threatening global economic growth and millions of jobs. A new report by Economist Impact, sponsored by Swift, examines the increasing segmentation of financial markets. Using economic modelling and expert insights, it forecasts how fragmentation could unfold in 2030 and quantifies its potential impact on global and national outcomes, including GDP and employment.
Financial fragmentation refers to a decline in the international flow of finance, disrupting cross-border investment, credit, and payments. This reduction in global capital flows threatens to unravel the intricate web of connections that sustain the modern economy.
Financial integration, the antidote to financial fragmentation, is the bedrock of a globalised world. It opens doors and unlocks opportunities for workers, businesses, and countries. Although the benefits are not always distributed evenly, the net effect has been reduced global poverty and the rise of an interconnected and interdependent world.
The report and analysis titled “Growth at a crossroads: measuring the cost of financial fragmentation” examines the probable drivers of fragmentation in the short- to medium-term and maps out three potential future scenarios: “the new normal”, “escalation” and “mitigation”. These qualitative scenarios are integrated into a comprehensive modelling and quantitative analysis, and supported by in-depth interviews with experts in global and regional finance.
The report warns that in the worst-case scenario of escalating financial fragmentation, global GDP could shrink by 6%, and nearly 280 million jobs could be lost. Middle-income countries like China, Kenya, and South Africa would face the hardest hits, with high-skilled workers bearing the brunt more than their lower-skilled counterparts.
To avoid a poorer and more divided world, the report calls for harmonised regulation, stronger international cooperation, and innovation in markets and financial systems. Policymakers must improve access to financial services to strengthen international co-operation, financial institutions should enhance risk management to mitigate geopolitical threats, international organisations can promote open markets and competition, and technology providers need to develop integrative solutions that enable financial institutions to become comprehensive hubs for their customers.
John Ferguson, Practice lead for New Globalisation at Economist Impact, said:
“A globally connected world rests on a strong and integrated financial flow of capital, assets and information. Increasing financial fragmentation will only harm this integrated ecosystem, raise costs and threaten the stability of businesses and jobs. Efforts by institutions and policymakers to mitigate these effects now and counter fragmentation will ensure the rewards gained by globalisation will not be lost or priced higher.”
