Global imbalances near 150-year high, posing economic risks

Global current account imbalances, once thought to be receding after the 2008 crisis, have surged to near 150-year highs, now marked by their historical scale and increased persistence.

The International Monetary Fund's External Balance Assessment indicates that roughly half of these imbalances have been 'excessive' over the past decade, with the largest increase in 2024 driven by the United States, China, and the euro area.

A striking feature is the persistence of excess surpluses, with 76 percent of countries maintaining them for at least five years in the 2020s, up from 16 percent in the 1990s.

While tariffs are not a primary driver, novel empirical evidence suggests that intensive industrial policy, when combined with consumption-suppressing measures, is associated with larger current account surpluses.

Furthermore, financial factors, such as the dollar's global reserve currency status and the accumulation of large net international investment positions, amplify these macroeconomic dynamics, encouraging persistent US deficits and entrenching underlying forces rather than resolving them.

Large, persistent imbalances pose risks through political, adjustment, and financial channels.

Politically, they fuel protectionist responses, reminiscent of the damaging trade tensions of the 1930s.

Adjustment risks are asymmetric: deficit countries face market discipline and potential debt crises, while surplus countries lack equivalent constraints, allowing imbalances to endure.

Unilateral adjustments risk depressing global demand or pushing up interest rates.

Financially, large external balance sheets interact with systemic vulnerabilities; the deteriorating US net international investment position and fragilities in non-bank finance are particular concerns.

A longer-term risk involves persistent trade surpluses, combined with consumption-suppressing policies, potentially crowding out domestic tradables sectors and eroding innovation in other economies, a phenomenon termed the 'financial resource curse'.