Global imbalances are back

By Clare Lombardelli and Ambrogio Cesa-Bianchi

A problem we thought was behind us

Just over a decade ago, many international policymakers allowed themselves a moment of cautious relief. The global financial crisis of 2008–09 had, among other things, exposed the risks that large and persistent current account imbalances can create. In its aftermath, those imbalances had narrowed sharply. The US current account deficit had halved. China's surplus had fallen by nearly three quarters. It felt, cautiously, like a turning point.

It wasn't. Today, global current account imbalances are near their highest levels in 150 years. And on each of the three occasions in modern history when they were higher, economic turmoil or crisis followed. That is not a prediction – but it is a fact that deserves serious attention. A team at the Bank of England has done exactly that: their new Staff Discussion Paper examines the drivers and consequences of global imbalances in depth, bringing together historical perspective, empirical evidence and analytical rigour. This article draws on their findings and offers some reflections on what the evidence means for policy. We recommend the full paper to anyone who wants to engage with the analysis in detail.

Chart 1: Global current account balances as a percentage of world GDP, 1870–2024

Three features of today's imbalances stand out. First, they are historically large. Second, they have become more persistent, especially where there are surpluses. And third, they are unfolding as we see rising trade tensions, a sharp increase in the use of industrial policy, and growing concern about the resilience of the global financial system. Understanding what is driving them – and what risks they create – is not an academic exercise. It is a policy priority.

What is driving global imbalances?

The starting point for any serious analysis of current account imbalances is macroeconomics. A country's current account position reflects the difference between what it earns and what it spends – a gap shaped above all by deep structural forces: demographics, levels of development, resource endowments, and the saving and investment decisions of households, firms and governments.

The International Monetary Fund’s (IMF's) annual External Balance Assessment provides the most comprehensive framework for assessing whether imbalances are ‘excessive’ – that is, whether they go beyond what these structural factors would justify. It finds that around half of all imbalances, on average over the past decade, have been excessive in this sense. The increase in excess imbalances in 2024 was the largest in a decade, with the United States, China and the euro area as the primary contributors.

But here is where the analysis becomes more challenging. A significant share of excess imbalances remains unexplained by the standard framework. And excess surpluses in particular have become strikingly more persistent: in the 1990s, around 16% of countries with excess surpluses had maintained them for at least five years; by the 2020s, that share had risen to 76%. The probability that a current account surplus lasts more than 20 years is now nearly double the equivalent probability for deficits.

Chart 2: GDP-weighted share of countries where deficits or surpluses persist over five years, by decade

Something structural appears to be going on that standard frameworks are not fully capturing. Two candidate explanations are worth examining. The first is tariffs and trade policy uncertainty may be playing a role. Yet the standard economic argument – that a permanent tariff raises income and consumption roughly equally, leaving the saving-investment balance unchanged – appears to hold reasonably well in the data. Tariffs may disrupt trade flows and reduce economic efficiency, but they are unlikely to be a primary driver of current account gaps.

The second candidate is industrial policy, which has surged globally over the past decade and accelerated sharply during and after Covid. Standard economic models suggest industrial policy should not affect the current account in the long run for similar reasons. But this view has an important qualification. If a country combines industrial policy with measures that suppress domestic consumption – capital controls, managed exchange rates, the accumulation of large foreign exchange reserves – then the income gains from subsidies may not be absorbed at home.^{footnote [1]}

Novel empirical evidence, constructed using firms' earnings call transcripts to measure industrial policy exposure, finds that more intensive industrial policy is associated with larger current account surpluses – but only in countries where such consumption-suppressing policies are also in place.^{footnote [2]} Where capital accounts are open, exchange rates flexible, and reserve accumulation is not large, no such association is found.

Financial factors reinforce these macroeconomic dynamics in important ways. The dollar's unique status as global reserve currency creates demand for dollar-denominated safe assets. This encourages the US to run persistent current account deficits, with some estimates suggesting this effect may account for as much as 2% of GDP. The widespread use of the dollar in invoicing global trade has also weakened the responsiveness of trade flows to exchange rate movements, complicating adjustment. Meanwhile, the accumulation of large net international investment positions creates its own feedback loop: the primary income flows that these positions generate – interest payments, dividends, retained earnings – now account for over a third of recent changes in the US current account deficit. With stock imbalances highly persistent, this dynamic is likely to deepen rather than resolve of its own accord. Financial factors are amplifying and entrenching underlying macroeconomic forces rather than as independent drivers of imbalances.

What's at stake?

The risks from large, persistent imbalances operate through several channels, and it is worth being clear-eyed about each.

The most immediate and visible risk is political. Large imbalances tend to generate pressure for protectionist responses, and we are seeing this play out. The protectionist dynamics of the 1930s offer a sobering historical reference – not as an inevitable template, but as a reminder of how quickly trade tensions can become self-reinforcing and damaging to the global economy.

A second set of risks concerns adjustment. History shows that the burden tends to fall asymmetrically. Deficit countries face market discipline – rising borrowing costs, the threat of sudden stops in external financing, and in extreme cases painful debt crises. Surplus countries face no equivalent constraint; their imbalances can persist for decades. This asymmetry matters for how adjustment, when it comes, is likely to unfold. Unilateral adjustment by deficit countries – through spending cuts – could depress global demand significantly, potentially beyond the capacity of monetary policy to offset. Unilateral adjustment by surplus countries – through rapid expenditure increases – could push up global interest rates at a moment when many governments already face tight fiscal constraints and large public investment needs.

A third set of risks is financial. Large and persistent imbalances accumulate into large external balance sheets, and it is the interaction between those balance sheets and vulnerabilities in the financial system that poses the most pressing near-term concern. The US net international investment position has deteriorated sharply and is on a path that raises questions about long-run sustainability. The sharp rise in US Treasury yields since 2022 has eroded the 'exorbitant privilege' the US has traditionally enjoyed as issuer of the global reserve currency. Known fragilities in non-bank finance – particularly in core government bond markets – could, in a tail risk scenario, interact with these large external positions in disruptive ways.

Finally, there is a longer-term concern that surveillance frameworks have yet to fully grapple with. When a country runs persistent trade surpluses through a combination of subsidies and policies that suppress domestic consumption, the counterpart countries absorb excess supply. Over time, this may crowd out domestic tradables sectors, reduce manufacturing employment, and erode innovation activity and long-run productivity – a dynamic that some economists have described as a 'financial resource curse'. ^{footnote [3]} How significant this channel proves to be will depend on the scale and durability of the underlying policies. But it is a mechanism that deserves more analytical attention than it has received.

What would a good resolution look like?

There are no easy answers here, but the analysis does suggest some directions.

Orderly, symmetric adjustment is in everyone's interest. A co-ordinated approach – in which surplus countries expand domestic consumption and investment while deficit countries undertake gradual fiscal consolidation – could reduce imbalances while supporting global growth. IMF scenario analysis suggests that a well-designed combination of policy adjustments across the US, the euro area and China could raise global GDP while bringing current account gaps meaningfully closer to warranted levels. Crisis-driven or purely unilateral adjustment, by contrast, risks large costs for all parties with no guarantee that imbalances would actually narrow.

Better analysis and surveillance are also needed. The IMF's workhorse framework for assessing external imbalances does not yet account adequately for the role of industrial policy, for the spillovers from distortionary policies more broadly, or for the interaction between large external balance sheets and financial stability risks. Closing these analytical gaps would give multilateral institutions a firmer foundation from which to engage with the countries where these issues are the most pressing. Closer collaboration between the IMF and World Trade Organization on trade and industrial policy governance would help too.

None of this is straightforward. Large surplus countries have limited market incentives to adjust; large deficit countries face competing domestic pressures. The multilateral institutions that might facilitate co-ordination have seen their authority tested in recent years. But the alternative – allowing imbalances to widen further while hoping for a smooth adjustment – carries its own risks.

Looking ahead

Global imbalances were supposed to be a problem of the past. They are not. They are historically large, increasingly persistent, and unfolding in a policy environment that amplifies rather than dampens their effects. The risks – to growth, to financial stability, to the open trading system – are real, even if their precise contours remain uncertain.

Good policy begins with good diagnosis. The analytical tools for understanding global imbalances are improving – incorporating new measures of industrial policy, better models of long-run spillovers, and sharper frameworks for assessing financial stability risks. Getting the diagnosis right does not guarantee a good policy response, but it is an indispensable precondition for one. We hope this work contributes to that effort.

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