Chief Economists Outlook January 2025

19Chief Economists Outlook The financial sector is something of an outlier, with less than half (48%) expecting increased fragmentation over the next three years. This is likely to reflect the pivotal role of cross-border financial flows in the functioning of modern economies and the level of disruption that would follow any significant fragmentation of the system. This situation is not without risks, however, given current levels of political volatility. The evidence of recent years suggests that there is a growing appetite among some to break established norms and patterns, even if this entails significant disruption.39 Moreover, it should be noted that finance is by no means immune from fragmentation trends: for example, geopolitical tensions already have a marked impact on foreign direct investment (FDI)40 and portfolio investment flows.41When the chief economists were asked about the factors contributing to current levels of fragmentation, domestic and international political drivers stand out (see Figure 11). More than 90% of respondents view geopolitical rivalries as an important factor, with two-thirds viewing them as very important. The strategic rivalry between the US and China is at the heart of this, but there is mounting evidence of wider disruptions in the geopolitical landscape. According to one measure published last year, geopolitical and geoeconomic fragmentation has risen sharply since the global financial crisis, peaking during the COVID-19 pandemic.42 However, recent events, particularly in Ukraine and across the Middle East, suggest that the trend of widening and intensifying geopolitical instability may still have some way to go. Share of respondents (%)3 3 315 50 99 45 42 Technology/DataFinance Services Labour56 26 15 21 15 68 21 15 79 6 GoodsMuch higher fragmentation Higher fragmentation Stable Higher integration Much higher integrationFigure 10. Fragmentation outlook What is your expectation for the integration or fragmentation of the global economy in the next three years in the following areas? Source: Chief Economists Survey. (2024, November). 39 Williams, A. (2024). 40 Boeckelman, L. et al. (2024). 41 Catalan, M. et al. (2024). 42 Fernández-Villaverde, J. et al. (2024).