Is the Global Economy More Fragile Than It Looks?
In 2025, escalating global tariff frictions, heightened geopolitical tensions, trade policy uncertainty, and high financial market volatility will all put pressure on the global economy. While global trade continues to grow, the global economy exhibits fragile resilience. Although data does not indicate a deep recession, the combined effects of weak global demand, sluggish private investment, a manufacturing cycle downturn, and the transmission of low growth from developed economies to the global economy are pushing global growth from a weak state to a lower downward trajectory. New trade policy barriers are being implemented gradually, and political uncertainty and declining investment are hindering economic growth, but demand has surprisingly remained strong. The report attributes this strong demand to loose global financial conditions, supportive macroeconomic policies, and new investments in artificial intelligence.
Fragmentation is extremely harmful
The idea that an interdependent global economy can function within a geopolitical system based on the sovereignty of nearly 200 countries often reflects a degree of idealism. Perhaps, more like arrogance. After all, this strange conglomerate disintegrated in the 1930s, and its fragmentation persisted until the end of World War II.
But idealism did not die. The global system was subsequently rebuilt on agreed-upon rules, jointly participated international institutions, a degree of mutual tolerance, and crisis management. From the outset, security considerations were kept as separate from the economy as possible. This became particularly important in the 1990s, when countries with vastly different systems began to integrate into the global economy.
Today, the foundations of this system are being rapidly eroded, and the process of global economic integration appears to be reversing. Gita Gopinath, First Deputy Managing Director of the IMF, recently explained that economic fragmentation could have profound implications for trade, such as affecting efficiency and increasing macroeconomic and financial volatility. Economic fragmentation could also reduce capital flows to the Global South and undermine the supply of global public goods, including climate action.
Five key factors are driving this trend toward economic fragmentation:
- Increasing geopolitical risks exacerbate distrust and reduce the willingness of systemically important countries to cooperate.
- Key countries are increasingly allowing security considerations to influence economic policies, with some taking broad actions to secure access to factors of production, infrastructure, and technology. While this is understandable, countries must exercise restraint. While globalization has been gradual, the deglobalization process driven by security measures is likely to be rapid and uncontrollable, posing serious systemic risks.
- The rift between the Global North and Global South is widening. Public and private sector support for developing economies has collapsed as many struggle to cope with the effects of the COVID-19 pandemic and climate change. The decades-long trend of convergence with developed economies appears to have stalled. In the Global South, resentment is building. Net capital flows to developing countries turned negative in 2023, and this trend worsened in 2024.
- Climate and disaster risks are escalating rapidly. With a surge in mega-floods, fires, and droughts, many countries face instability risks in the coming years, but we lack a global "safety net."
- The exponential growth of artificial intelligence is intensifying competition between nations rather than fostering the necessary global cooperation. As MIT professors Daron Ajemoğlu and Simon Johnson have stated, regulations, policies, and institutions are essential to ensure that AI creates jobs, rather than simply destroys them. Global South nations need a voice in AI regulation.
Multiple Reforms to Address Economic Challenges
In response to the downside risks facing the global economy, UNCTAD's report points out that the most important structural reform is the reform of the international financial architecture to reduce exchange rate volatility, financing costs, and external vulnerabilities, thereby promoting balanced growth. This includes reducing excessive reliance on dollar financing channels and enhancing domestic demand and investment capacity.
Furthermore, it is crucial to strengthen the construction of a rules-based, multilateral, and non-discriminatory trading system, maintaining the WTO-centered, rules-based multilateral trading system, and preventing the increasing fragmentation of trade policies. Strengthening coordination within the UN system, the G20, BRICS, and other regional cooperation platforms is essential to reduce trade policy uncertainty and enhance the global trade's ability to cope with shocks.
Key Conclusion
The global economy is currently in a state of "fragile resilience," with apparent stability masking the accumulation of structural contradictions. If technological bottlenecks cannot be overcome or trade frictions cannot be alleviated by 2026, the global economy may face the most severe growth stagnation since the 1980s.
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