Global imbalances persist, driven by macro factors and industrial policy
A Bank of England Staff Discussion Paper highlights the re-emergence of large and persistent global imbalances, primarily driven by macroeconomic factors and increasingly by industrial policy. These imbalances pose risks to global growth, trade stability, and financial stability.
Imbalances reach historical highs
Global current account imbalances are near their highest levels in 150 years, historically preceding economic turmoil or crisis.
The paper notes that surpluses have become particularly persistent, with some countries maintaining them for over 20 years.
These imbalances are primarily driven by domestic macroeconomic factors such as demographics, development levels, cyclical conditions, and policy settings.
While industrial policy is not a primary driver, its resurgence globally can have second-order impacts on current accounts in the short to medium term, and its longer-term effects and spillovers are still partially understood.
The authors emphasize that large and persistent imbalances can lead to trade tensions and accumulate into significant external positions, presenting vulnerabilities that could interact with other global financial stability risks in disorderly unwind scenarios.
The shadow of protectionism
The paper warns that the most relevant risk from today's large, persistent current account imbalances is a potential shift towards protectionism, recalling the exacerbating effects of such actions in the 1930s.
Historically, large imbalances have also preceded financial crises, as seen before 2007.
Unlike the Bretton Woods era with its formal adjustment mechanisms, today's open capital markets and flexible exchange rates lack such symmetrical adjustment, leading to slow rebalancing.
The authors advocate for an orderly and symmetric rebalancing to reduce risks to growth and financial stability, requiring reform of multilateral stewardship, strengthened surveillance, and closer collaboration on global governance of trade policy.
Timely warning, complex solutions
This discussion paper offers a timely and comprehensive re-evaluation of global imbalances, correctly highlighting their persistent nature and the growing, albeit secondary, role of industrial policy.
While the analysis of macroeconomic drivers is robust, the proposed multilateral policy solutions face significant geopolitical headwinds, making their implementation challenging.
Ultimately, the paper underscores that ignoring these imbalances risks a return to past economic instability and trade conflicts.