Global Economy: Fragmentation risk is becoming “normalised” in the data

The global economy used to treat geopolitical fragmentation as a tail risk.

Increasingly, it looks like it’s being priced as part of the baseline.

Here are three under-covered research-driven signals.

1) IMF working paper: “Playing with Blocs” and the economics of fragmentation

The IMF has published a working paper exploring what happens when trade and economic links reorganise into blocs.

Why it matters:

• Fragmentation can reduce efficiency, raise costs, and change inflation dynamics.
• It can also redirect investment flows and supply chains, affecting jobs and prices across countries.

2) Bank of England: risks include fragmented trade and stretched AI-linked valuations

The Bank of England’s December 2025 Financial Stability Report flags ongoing macro uncertainty, including fragmentation of trade and markets.

It also notes that some risky asset valuations remain stretched, with particular emphasis on parts of the AI-driven tech complex.

Why it matters:

• When valuations and fragmentation risk coexist, shocks can travel faster through the system.
• Cyber and operational disruption risk rises in periods of heightened geopolitical tension.

3) BIS quarterly work highlights how “financial conditions” can detach from real economy signals

BIS research regularly focuses on how financial cycles behave — especially when liquidity and risk appetite push prices ahead of fundamentals.

Why it matters:

• Household budgets are hit later (via rates, jobs, and inflation), but the stress often starts in market plumbing.

What to watch next

• Evidence that trade fragmentation increases costs in consumer goods and energy inputs.
• Whether central banks shift language from “temporary shocks” to “structural fragmentation”.
• Whether valuations cool without broader damage.

Sources (accessed December 2025)

• IMF working paper (IMF Working Papers index) https://www.imf.org/en/Publications/WP

• Bank of England: Financial Stability Report (December 2025) and PDF https://www.bankofengland.co.uk/financial-stability-report/2025/december-2025 https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2025/financial-stability-report-december-2025.pdf

• BIS: Quarterly Review (BIS publications) https://www.bis.org/publ/qtrpdf/

Disclaimer: This article is for general informational and educational purposes only. It does not constitute financial, investment, tax or legal advice and does not take into account individual circumstances.