Navigating Global Financial System Fragmentation 2025

FIGURE 9 Long-run shortfall of GDP relative to IMF forecast Shortfall of GDP relative to IMF forecast – United States -2.3% -3.0%-2.0%-1.0%0.0%2025 2026 2027 2028 2029 -2.2%-2.0% -2.0%-1.8%Shortfall of GDP relative to IMF forecast – Brazil 2025 2026 2027 2028 2029 -4.1%-3.9% -3.9%-3.6% -4.3% Shortfall of GDP relative to IMF forecast – India -7.0%-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%2025 2026 2027 2028 2029 -6.6%-6.1%-5.4% -5.4%-4.6% Very high fragmentation Moderate fragmentation High fragmentation Low fragmentationShortfall of GDP relative to IMF forecast – China -5.0%-3.0% -4.0%-2.0%-1.0%0.0%2025 2026 2027 2028 2029 -4.4%-4.0% -4.0% -4.3%-3.7% -5.0%-3.0% -4.0%-2.0%-1.0%0.0% Note: Figure shows the projected shortfall of GDP relative to annual IMF Real GDP growth projections. Source: Based on multi-country multisector model of Baqaee & Farhi (2024).39 Data from 2013 World Input-Output Database and Asian Development Bank’s 2023 Input-Output Tables and IMF. Each year’s impact is calculated by applying the ratio of the trade elasticity for the associated number of years since 2024 to the 10-year trade elasticity as found in Boehm et al. (2023) to the elasticities in Baqaee & Farhi (2024) The costs of a fragmented financial system are particularly acute for EMDEs, where capital flows and costs are more influenced by geopolitical factors, potentially jeopardizing their growth prospects and convergence opportunities.40 Without access to necessary pools of capital and investment, these states may seek financial support outside the international rules-based system, further exacerbating fragmentation. A fragmented financial system could undercut financial stability and hinder coordinated global responses to financial shocks. More fragmentation could mean that EMDEs receive less support during 2.2 Impact on EMDEs Navigating Global Financial System Fragmentation 20