Goldman Sachs: Long-term geopolitical bloc shifts matter more for global GDP than short-term risk events

Overview

Goldman Sachs' global economics team studies the impact of geopolitics on the global economy and distinguishes between two types of variables: one is geopolitical risk events such as wars, crises, and diplomatic incidents, and the other is the slower-moving but more persistent geopolitical alignment or bloc relationships between countries. The report concludes that the direct drag from short-term risk events on GDP is generally limited and fades relatively quickly, while changes in bloc relationships can significantly affect economic levels over the long term through trade, fixed investment, foreign direct investment, and financial linkages.

Core views

The core judgment of the report is that markets often focus on the impact of geopolitical conflicts on oil prices and short-term growth, but what truly matters more is the structural shift in global geopolitical bloc relationships. Shocks from risk events usually decay significantly within two years and largely fade after five years, whereas bloc-relationship shocks can persist for around 14 years. A one-standard-deviation increase in a country's alignment with the rest of the world raises GDP levels by about 3% on average within seven years. Historically, improved relations with Western countries have delivered larger GDP gains, with emerging markets benefiting especially strongly because they rely more on external capital, trade openness, lower resource dependence, and institutional spillovers.

Analysis framework

The report combines academic geopolitical risk indices, a global geopolitical events database, and Goldman Sachs' local projection models to estimate the effects of geopolitical risk events and changes in bloc alignment on GDP, GDP components, bilateral trade, FDI, and foreign exchange reserve allocation. In the short-term section, it controls for oil prices to examine the direct impact of risk events on quarterly GDP growth; in the long-term section, it uses a country-level GDP-weighted bilateral alignment index and controls for country fixed effects, time fixed effects, and regional time effects to identify the impact of changes in a country's bloc relationships relative to other countries on GDP levels.

Methodology notes

• Macro MeasurementGeopolitical Risk Index

  Risk Event Intensity

  Uses the country-level geopolitical risk index proposed by Iacoviello and Tong (2026), which analyzes historical newspaper articles with LLMs to measure the number and intensity of risk events such as military conflicts, political crises, and diplomatic incidents.

• Macro MeasurementGeopolitical Alignment Index

  Inter-country Bloc Relationships

  Builds bilateral alignment scores based on Fan (2025)'s Global Geopolitical Events Database, then forms a country-level global alignment indicator through GDP-weighted averages to measure a country's overall relationships with other countries.

• Econometric MethodLocal Projection Model

  Shock Response Estimation

  The report uses local projections to estimate the persistence of risk events and bloc-relationship shocks and their dynamic effects on GDP, trade, investment, FDI, and reserve allocation.

• Scenario AnalysisBloc Relationship Reversion Scenario

  Global Fragmentation Path

  The report sets an upside scenario in which global alignment gradually returns to mid-2010s levels, and a downside scenario in which fragmentation deteriorates again in a manner similar to the late 2010s, to estimate GDP effects by the end of this decade and over the long term.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global GDP

  Core affected asset

  Strengths

  Improved bloc relationships can raise long-term GDP levels through trade, investment, and capital flows.

  Weaknesses

  The direct drag from short-term risk events on GDP is usually limited, but the commodity channel may amplify the shock.

  Comparison

  The economic impact of long-term bloc-relationship changes is greater than that of most one-off geopolitical risk events.

  Risks

  Continued deterioration in global fragmentation could depress long-term GDP.

• Emerging Markets

  Highly sensitive beneficiaries or losers

  Strengths

  Improved external relations can bring larger gains through trade, investment, and institutional spillovers.

  Weaknesses

  More vulnerable to declines in risk appetite and capital outflows.

  Comparison

  The report argues that emerging markets gain more GDP upside from improved bloc relationships than developed markets.

  Risks

  If relations with major economic blocs deteriorate, the growth drag could be larger and more persistent.

• Commodities and Oil Prices

  Short-term shock transmission channel

  Strengths

  In crises involving major oil-producing regions, oil prices are a clear macro transmission variable.

  Weaknesses

  Most geopolitical events do not have a significant relationship with monthly oil price changes.

  Comparison

  The report argues that markets often overfocus on the oil-price channel while overlooking the long-term channel of bloc relationships.

  Risks

  Hormuz, conflicts in oil-producing regions, or supply disruptions could still amplify the GDP shock.

• Trade, FDI, and Foreign Exchange Reserves

  Long-term efficiency channel

  Strengths

  Improved bloc relationships raise bilateral trade, increase inward and outward FDI, and alter U.S. dollar reserve allocation.

  Weaknesses

  The impact on portfolio flows is not significant, and the direct effect of some financial channels on GDP is unclear.

  Comparison

  Trade and fixed investment are the main GDP-enhancing components, while FDI and reserve changes more reflect capital allocation efficiency.

  Risks

  Declines in cross-bloc trade and FDI would weaken global resource allocation efficiency.

Key data

• Direct drag from Iran war-related risk on global growthAbout 0.3 percentage pointsGoldman Sachs estimates that the global geopolitical risk index in the first half of 2025 was 30% higher than in the second half of 2024, making Q1-Q2 global growth about 0.3 percentage points lower than in a no-Iran-war scenario, excluding the commodity channel.
• Oil price rule of thumbA 10% rise in oil prices drags on global GDP by about 0.1%The report cites Goldman Sachs' rule of thumb and says that Hormuz-related shocks have already erased about 0.3% of global GDP this year.
• Long-term GDP effect of improved geopolitical alignment for an individual countryAbout +3%A one-standard-deviation improvement in country-level alignment raises average country GDP levels by about 3% after roughly seven years.
• Duration of bloc-relationship shocksAbout 14 yearsGeopolitical alignment shocks fade much more slowly than risk-event shocks; risk events largely dissipate after five years.
• Cumulative effect of fragmentation on global GDP since 2016About -1%The report estimates that the rise in global fragmentation since 2016 has cumulatively dragged on global GDP by about 1%, with about 1.9% drag for emerging markets and about 0.8% for developed markets.
• Upside scenario of returning to mid-2010s alignment levelsGlobal GDP about +0.8% by 2030If geopolitical alignment gradually returns to mid-2010s levels, global GDP will be additionally about 0.8% higher by the end of this decade.
• Downside scenario of further fragmentationGlobal GDP about -1% over the next decadeIf a second deterioration comparable to the late 2010s occurs, global GDP over the next decade will be about 1% lower relative to a no-deterioration scenario.
• Impact of improved bilateral alignment on tradeBilateral trade volume about +6%The report states that a one-standard-deviation improvement in bilateral geopolitical alignment persistently raises bilateral trade volumes.
• Impact on U.S. dollar reserve allocationDollar asset share about +3 percentage pointsA one-standard-deviation increase in the U.S. bilateral alignment index is associated with about a 3-percentage-point increase in the share of dollar assets in central bank foreign exchange reserves.

Impact & implications

From an investment perspective, if short-term geopolitical conflicts do not trigger commodity supply disruptions, the direct macro impact may be smaller than market intuition suggests; however, the blocization of global trade, the reorganization of investment flows, and changes in FDI and reserve allocation will have a deeper influence on the long-term growth landscape. Emerging markets are more sensitive to changes in bloc relationships: countries with improving relationships may benefit from capital, trade, and institutional spillovers, while countries with worsening relationships face more persistent growth drags.

Risks

• Continued increases in global geopolitical and economic fragmentation drag on long-term GDP, trade, and investment.
• Commodity supply disruptions, especially risks related to major oil-producing regions or the Strait of Hormuz, could amplify short-term growth shocks.
• Emerging markets are more vulnerable to weaker risk appetite, capital outflows, and tighter external financing conditions.
• There is difficulty in causally identifying the link between improved bloc relationships and economic growth, as economic progress itself may also drive relationship improvements.
• Data after 2024 do not yet fully capture the potential further deterioration in global alignment from 2025 tariffs and the Iran war.

What to watch

• Whether the global geopolitical alignment index continues to approach or fall below lows seen since the 1980s.
• Whether the Iran war, Hormuz shipping, and oil prices continue to normalize.
• Changes in bilateral relationships among the United States, the United Kingdom, Europe, and emerging markets.
• Whether the growth drag continues in countries whose alignment has declined in recent years, such as China, Russia, Canada, and Israel.
• Whether countries with improved alignment, such as Thailand, Ecuador, and Saudi Arabia, show growth gains through trade and investment channels.
• Changes in cross-bloc trade, FDI, and U.S. dollar reserve allocation.