Global Economy 2024Trends: Geo-Economic Fragmentation

Prepare your Transformation Initiatives to mitigate risks for the next 2 years.

Geoeconomic fragmentation refers to the increasing division of the global economy into blocs or regions with distinct economic policies, standards, and possibly competing geopolitical interests.

The Center for Strategic and International Studies (CSIS) has explored four scenarios for the geopolitical order in 2025–2030, focusing on the relative power and influence of the United States and China. These scenarios underscore the fragmenting world order without a clear organizing principle, where the most important variables are the bilateral relationship between the United States and China and their relative influence and leadership. This analysis suggests that the highest likelihood outcome for world order in the next decade would not be a unipolar or bipolar competition but a loose multipolarity, with the influence of other nations like India, Japan, Germany, France, the United Kingdom, and others becoming more significant. Geopolitical tensions, particularly the behavior of Russia, Iran, and North Korea, and the evolving China-Russia relationship, are highlighted as critical factors in this changing landscape.

Key Scenario Elements — Center of Strategic & International Studies [1]

The World Economic Forum’s Chief Economists Outlook for January 2024 and KPMG’s Global Economic Outlook further reinforce the notion of an uncertain future with significant geopolitical and economic shifts. The KPMG report warns of potentially large output losses from geoeconomic fragmentation over the longer term, forecasting global GDP growth of 2.2% in 2024, down from 2.6% in 2023, with a return to 2.6% growth anticipated in 2025. This outlook highlights the impact of geopolitical tensions, rising protectionist measures, and the plateauing of global trade in recent years on the global economy.

Geoeconomic fragmentation clouds the outlook — World Economic Forum [2]

Companies should consider several strategies to adapt their operations activities effectively. This fragmentation can significantly impact global trade, investment flows, and the operational strategies of multinational companies. Here are some strategies companies can adopt:

1. Diversification of Supply Chains: Companies should look to diversify their supply chains to mitigate risks associated with reliance on a single country or region. This can involve identifying alternative locations in different geopolitical blocs to ensure continuity in the face of disruptions.

2. Nearshoring and Friend-shoring: Moving production/services closer to home (nearshoring) or to politically aligned countries (friend-shoring) can reduce vulnerabilities associated with geopolitical tensions. Companies can benefit from improved supply chain resilience, reduced transportation costs, and potentially more favorable trade terms within these regions.

Growing interest in making supply chain less vulnerable to uncertainty — KPMG [3]

3. Investment in Digital and Automation Technologies: Leveraging digital technologies and automation can help companies become more flexible and responsive to changes in the global trade environment. Advanced technologies such as AI, Intelligent Automation can enhance supply chain visibility and efficiency, making it easier to adapt to new trade barriers or shifts in policy.

Impact of Generative AI in 2024 — World Economic Forum [2]

4. Enhanced Risk Management and Business Continuity Plan: Companies need to adopt robust risk management and BCP frameworks that include geopolitical risk as a core component. This involves regular scenario planning, stress testing supply chains against potential geopolitical disruptions, and developing contingency plans.

As a special remark, companies making investments on Automation Technologies like GenAI, should evaluate carefully use cases and evaluate risks on possible changes on EU ACT and other AI policies that could restrict the usage of planned GenAI use cases.

US regulators declare AI-generated robocalls illegal | Euronews

5. Building Strong Local Partnerships: Establishing strong relationships with local partners, suppliers, and governments in key markets can provide a competitive advantage. These partnerships can facilitate better market access, reduce operational risks, and provide insights into local market dynamics.

By implementing these strategies, companies can better prepare for and navigate the complexities of geoeconomic fragmentation, ensuring their offshoring activities are resilient in the face of changing global economic conditions.

References:

[1] Four Scenarios for Geopolitical Order in 2025–2030: What Will Great Power Competition Look Like? (csis.org)

[2] What will happen to the global economy in 2024? | World Economic Forum (weforum.org)

[3] KPMG Global Economic Outlook

[4] US regulators declare AI-generated robocalls illegal | Euronews