Macklem highlights risks from widening global imbalances
Bank of Canada Governor Tiff Macklem warned Monday that widening global imbalances in trade and other economic flows pose a growing risk to financial stability that could 'sideswipe' countries such as Canada, despite their relatively stable policies. In a speech to the Chambre de commerce France-Canada in Paris, Macklem said that imbalances were growing at a time when the financial system was also evolving and becoming faster and less regulated.
Two clear risks to global financial stability
“That leaves us with two clear risks,” Macklem said. “First, large capital inflows into the United States could once again be misallocated — stretching valuations in equities and credit and setting the stage for a painful correction. Second, those flows could reverse suddenly. Either outcome could send stress far beyond U.S. borders.”
The G7 has been studying the topic of imbalances and the potential risks they pose. Macklem’s speech followed a March memo in which G7 economists said that excessive current account deficits and surpluses reflected increasingly unbalanced domestic growth dynamics in China, the European Union and the United States. China, they said, has chronically low domestic consumption, the EU has persistent weak levels of productivity and the U.S. has fiscal deficits that are too large relative to economic conditions.
Canada not a contributor but vulnerable
“Canada is not a contributor to excessive global imbalances, but we are being knocked by increased trade tensions, and we could be sideswiped if financial stability risks crystallize,” Macklem said, according to prepared remarks. “A better path would be to adjust the system before pressures reach a tipping point.”
Macklem said the first step is for deficit countries and surplus countries to agree on the problem: that global imbalances are rooted in domestic imbalances. China needs to consume more, the U.S. needs to save more and the EU needs to invest more. Addressing domestic imbalances will be beneficial to everyone, and adjustment will be smoother and more durable if it is coordinated.
Three ways to reduce imbalances
“The common thread is clear: when adjustment is delayed, imbalances persist, growth is held back and risks build across the global system,” Macklem said. The Bank of Canada governor listed three ways countries can work together to reduce global imbalances and protect financial stability. For one, countries like Canada and the EU should deepen trade and investment relationships even as the U.S. pulls back from open trade. An open global system allows capital to grow, supports economic growth and helps economies adjust to changes in supply and demand.
