data showing FDI had already more than halved from 3.3% of world output in the first decade of this century to just 1.3% in the four years since 2018 and that was just a taster of the problem.
"A fragmented global economy is likely to be a poorer one," it said, with FDI flows already increasingly concentrated between politically aligned countries - so-called friend shoring.
"If geopolitical tensions were to increase and countries were to move farther apart along geopolitical fault lines, FDI is likely to become more concentrated within blocs of aligned countries," it said.
And if FDI fragmentation is defined by a permanent rise in cross-bloc barriers to imported investment inputs, the IMF said developments could cut world output by 2% in the long term.
REALIGNMENT FACTS In a study entitled "Pandemic, War, and the Future of Trade," Boston Consulting Group earlier this year estimated that the net impact of splintered geopolitics will be to slow world trade growth below global output growth over the next nine years - a 2.3% annual pace versus 2.5% projected world GDP growth. But trade would still advance and so this was not de-globalisation per se, it said. Driven largely by severing energy ties, it saw EU trade with Russia shrinking by $262 billion by 2031 while Europe's trade with the United States will rise by $338 billion over the same period. Trade between the United States and China is seen falling by $63 billion in that time frame, while Russia's trade with China and India will grow by $110 billion.
BCG Managing Director Marc Gilbert was more upbeat about how the different blocs would reform and how many "third country" mid-tier emerging economies may benefit - the likes of Indonesia or Brazil for example. As it stood, globalisation had become too "brittle," he said. "One effect of slowing Western trade with both Russia and China will be a corresponding rise in commerce between northern and southern regions as countries find new trading partners in Africa, South America and Southeast Asia," Gilbert pointed out, showing ASEAN countries as "clear winners" with new trade with China, Japan, U.S. and EU over that time projected to be more than $1 trillion. Companies worldwide now needed to embed geopolitical scenarios into capital allocation and strategic planning, Gilbert said. "Geopolitical planning was for years a side issue in government relations departments - now it's in the C-suite." And for financial markets, fragmentation is top of mind too. Saxo Bank dubbed its quarterly outlook this week "The Fragmentation Game" - identifying structurally higher global inflation, access to energy and key commodities, and a greater value put in tangible assets as some key themes coming from it. "It's essentially the strategic geopolitical dynamic of ensuring more robust access to energy, technology and defence among large competing nation states," said Saxo equity strategist Peter Garnry. "Fragmentation of the global economy will likely put inflation at a higher structural level, and the cost of capital will likely go up, squeezing low-quality and leveraged companies."
The opinions expressed here are those of the author, a columnist for Reuters. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World trade data yet to show 'de-globalization' BIS chart on global trade as share of GDP BCG projections on world trade to 2031 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (By Mike Dolan, Twitter: @reutersMikeD Editing by Matthew Lewis)
Messaging: mike.dolan.reuters.com@thomsonreuters.net))