The investment risk outlook is among the IMF’s loudest warnings since the coronavirus pandemic regarding global economic damage, particularly to poorer countries, from the US-China geopolitical rift Long-term investments on things like factories or financial markets have begun to show the effects of the growing mistrust between the US and China Geopolitical fragmentation, driven by tensions between the US and China, risks damaging the global economy, with foreign direct investment and other capital increasingly being channeled toward aligned blocs of countries, the International Monetary Fund warns. Long-term investments on things like factories or financial markets have begun to show the effects of the growing mistrust between Washington and Beijing. “A fragmented world is likely to be a poorer one,” the IMF said in an excerpt released Wednesday of its upcoming World Economic Outlook. In one scenario it modeled, a world splintered into US and China-centered camps, with some countries including India and Indonesia non-aligned, could see global output fall by 1% in five years and 2% long term. The investment risk outlook is among the IMF’s loudest warnings since the coronavirus pandemic regarding global economic damage, particularly to poorer countries, from the US-China geopolitical rift. Relations between the world’s two biggest economies have deteriorated in recent years as they increasingly see each other as the top strategic and economic threat. While the countries’ leaders, Joe Biden and Xi Jinping, sought a smoother path since meeting face-to-face last November, fresh disputes have arisen over issues including the security of Taiwan, spying allegations, technology security and Russia’s invasion of Ukraine. The shift had already emerged in recent years, according to the IMF analysis that showed foreign direct investment from the second quarter of 2020 to the fourth quarter of last year declined by almost 20% from pre-pandemic levels. “Firms and policymakers are increasingly looking at strategies for moving production processes to trusted countries with aligned political preferences to make supply chains less vulnerable to geopolitical tensions,” the IMF said. New strategic policies, such as the sourcing and production requirements in the Inflation Reduction Act and the CHIPS and Science Act in the US, “suggest that a shift in cross-border capital flows is about to take place,” the IMF said. The report also pointed to a surge during company earnings calls of references to reshoring and “friend-shoring,” which refers to moving suppliers into aligned countries. In January, the IMF estimated that longer-term trade fragmentation — including restrictions on migration, capital flows and in international cooperation — should lop nearly 7% off global gross domestic product. A separate IMF analysis released Wednesday of financial system fragmentation, in its upcoming Global Financial Stability Report, warned that rising tensions could trigger cross-border outflows that would threaten financial stability. A split such as that between the US and China since 2016 could cut bilateral cross-border investment portfolios and bank allocations by about 15%, the IMF said. The tensions can also hit banks via the real economy, with disruptions to supply chains and commodities markets hurting domestic growth and spurring inflation, which could worsen credit losses. That stress is likely to make banks take fewer risks and cut lending, further slowing economic growth, the IMF said. Both full reports are scheduled to be released next Tuesday, during the IMF’s spring meetings in Washington.