McGeever: Global imbalances are back and there is no solution in sight.

Remember global imbalances?

They're back. The prospects of a coordinated reaction among major economic powers in a world?fractured and increasingly marked by protectionism and self-interest look remote.

Since the COVID-19 outbreak, the U.S. deficit in current account has widened, as have the surpluses of China and oil producers. The euro zone and other advanced economies also have a growing surplus. This reverses a decade-long trend of decline following the global financial crises.

According to Pierre-Olivier Gourinchas, a?economist at the International?Monetary Fund? and Christian Mumssen in a blog post this week, there is a clear historical precedent: growing imbalances can trigger abrupt reversals in capital flows. This could pose a threat to the global financial and economic stability.

It was the same in 2008 when surpluses and deficits were at record levels, as well as cross-border capital flow.

It's not that a repeat of the past is imminent, but there are some eerie similarities: large U.S. trade deficits, strong Chinese imports, oil at $100 per barrel, and increasing concern about opaque U.S. market segments (then subprime mortgages; now private credit).

The steady narrowing global imbalances after the global financial crisis came to an end with the pandemic. Since then, the imbalances have increased again. The "overall balance", which is the sum of the absolute values of the current account surpluses, has reached close to 4% global gross domestic product. That's high.

The IMF recipe for narrowing these imbalances and supporting sustainable growth is familiar - fiscal consolidation in deficit countries, more consumption-led growth in surplus economies, and productivity-enhancing investment elsewhere.

Current trends, however, are in the opposite direction. In the U.S. there is a large fiscal deficit and strong domestic consumption. In China the trade surplus has reached a record high. However the consumer remains weak after the property crash.

Adam Slater, Oxford Economics, says that these forces are "stubborn". His baseline forecast for the next couple of years shows the U.S. deficit in current accounts at around 3%, China's surplus at around 3%, and the Euro zone surplus hovering around 1.5%.

GLOBAL PROBLEM - GLOBAL SOLUTION

The risk associated with current account deficits and surpluses is not inherent. Misalignments between savings and investments that are "excessive", and exceed economic fundamentals, can be a concern. It is difficult to determine where these thresholds lie, how easy the adjustment will go, when it will happen, and what triggers this.

It is understandable that policymakers do not prioritize global imbalances. This issue may take years to manifest itself. There are other, more urgent problems to address, such as energy security, inflation and trade wars.

In the past year, the world economy has suffered a number of shocks. Many were fueled by U.S. president Donald Trump. These include tariffs, the unraveling of U.S. and European relations, questions about NATO's future, Federal Reserve Independence, and the Iran -war.

Oil prices fell below $100 after Trump's announcement on Tuesday, but not much else.

Fatih Birol is the head of the International Energy Agency. He said that the current energy crisis was more severe than the shocks in 1973, 1979, and 2022.

Multilateralism, which is not in fashion at the moment, would be ideal for global imbalances. The U.S. deficit budget is around 6% GDP and the Trump administration has no intention to reduce it. Washington could put more pressure on countries with surpluses like Germany, China and other Asian nations to correct imbalances.

Will they? China in particular seems to be firmly rooted in its export model.

The international relations are currently so fractured that it is difficult to imagine a coordinated response, including significant deficit reduction in the U.S., fiscal expansion in countries with surpluses, or coordinated exchange rate interventions. Or both.

In the last 40 years, global imbalances have undergone two distinct periods. Each period lasted about a decade.

The Louvre Accord in 1987 was the first time the world's leading powers came together, to stop the decline of the dollar. The global financial crisis in 2007-09 was not planned or smooth.

Since the pandemic, imbalances are at a historically high level. They are too important for policymakers to ignore.

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(source: Reuters)