International conflicts harm the world economy

The main current geopolitical tensions, such as rivalry between China and the United States or caused by Russian invasion of Ukrainethey change the flow of foreign direct investment and can eventually cause losses equal to 2% of global GDP.

That’s what he assured International Monetary Fund (IMF)who also warned that financial fragmentation resulting from polarization has important implications for global financial stability, as it affects cross-border investment, international payment systems and asset prices.

The IMF published its chapter Economic Outlook Report (WEO, in English) and another from Global Financial Stability Report (GFSR, English) which analyzes the consequences of the geopolitical fragmentation that has occurred in recent years and warns of the growing protectionism of many countries.

Next week, in the box spring meetings of the IMF and the World Bankthese reports will be published in full, updating the global growth forecast.

According to the IMF, concerns about global economic and financial fragmentation have intensified in recent years amid rising geopolitical tensions, between China and the United States, and also over Russia’s invasion of Ukraine.

One of the consequences of fragmentation is that as tensions rise “Companies and policy makers are increasingly looking for strategies to make supply chains more resilient moving production home or to proven countries”.

Examples of this are protectionist measures such as the US government’s decision to support local supply chains; The European Union’s Net Zero Industry Act “to counter subsidies in the U.S. Anti-Inflation Act,” while China has decided to replace imported technology with local alternatives.

In the WEO, IMF economists assess the global consequences and believe that fragmentation would bring about a permanent increase in investment barriers for blocs of countries. This could cause losses equal to 2% of global GDP.

“Simulations of various what-if scenarios suggest that it is likely that losses are unevenly distributedand that emerging markets and developing economies with reduced access to advanced economies will be particularly affected, both through lower capital formation and lower productivity gains.

As for the financial implications, fragmentation weakens financial relations between countries and investors bet less on geopolitically distant economies for various reasons.

Among them is that one financial constraints increase transaction costs or because of “general mistrust and fear of expropriation”.

An increase in tension between the investor and the host country reduces bilateral cross-border allocation portfolio investments and banking rights by approximately 15%, the IMF calculates.