For the better part of a year, policymakers and economists have been drawing attention to the financial stability risks of wide and persistent current account imbalances between countries. The alarm grew during the IMF-World Bank spring meetings last month and will reach fever pitch ahead of next month’s G7 summit in France.
The concern is well-founded. Imbalances, which are an inherent feature of the international trading system, are nearing their highest level in 150 years. According to the IMF, they are concentrated in a small number of major economies, heightening the risk to global output. In countries running a current account deficit, persistent imbalances have hollowed out domestic manufacturing and generated a political backlash, as today’s tariffs and other trade protectionism show.