Credit LoboStudio Hamburg/Unsplash
Credit LoboStudio Hamburg/Unsplash
Global current account balances widened by a sizable 0.6 percentage points of world GDP in 2024. When adjusted to account for the volatility around the pandemic and Russia’s war in Ukraine, the widening is a notable reversal of the narrowing since the global financial crisis and may signal a significant structural shift.
Our just released 2025 External Sector Report (ESR) presents the latest assessment of these imbalances for the 30 largest economies, representing about 90 percent of world output. This assessment constitutes a key part of the IMF’s mandate to encourage the balanced expansion of trade and economic growth and promote international monetary cooperation.
It is important to note at the outset that external surpluses or deficits need not be a problem and can be desirable to a degree. For instance, it is desirable for young or rapidly growing economies to finance part of their economic development with foreign capital. Conversely, older or less dynamic economies may need to save more and can obtain higher returns from cross-border investments.
The ESR has the difficult task of assessing when current account balances are broadly appropriate—that is, consistent with country fundamentals and desirable policies—and when they become excessive, signaling potential risks down the line for individual countries or the global economy.
Both excessive deficits and surpluses can be sources of risks.
The main risk for countries with excessive deficits is a rapid increase in risk premia, culminating in a sudden loss of market access, forcing them to go through an abrupt and painful adjustment. If the country has a large weight in the global economy or is very interconnected, the associated economic downturn may hurt others.
Excessive surpluses create risks too. First, excessive surpluses in some countries imply excessive deficits elsewhere. By depressing interest rates, they can induce other countries to borrow excessively. In cases where global interest rates cannot adjust downward -a liquidity trap- excess surpluses can depress activity globally, as I have shown in my own work. Surging surpluses in large economies can also create severe sectoral dislocations in trading partners and raise protectionist sentiment, with harmful effects on the global economy.
Often, excessive deficits or surpluses reflect domestic distortions -for instance overly loose fiscal policy in deficit countries, or insufficient safety nets that cause excessive precautionary savings in surplus economies. Assessing excessive current accounts requires a comprehensive analysis of the fundamental determinants of national savings and domestic investment decisions, and of the policies that affect them. This is an imperfect but necessary exercise.
Our assessment for 2024 shows that about two-thirds of the widening in global current account balances is in fact excessive. The increase in excess balances is the largest in a decade, driven primarily by China (+0.24 percent of global GDP), the US (-0.20 percent) and more modestly by the euro area (+0.07 percent).
The ESR confirms and expands on our September 2024 analysis, highlighting that China’s widening trade surpluses and growing US trade deficits reflect domestic macroeconomic imbalances in each country.
Accordingly, the correct remedies should be rooted in domestic macroeconomic policies. For Europe, this means spending more on public infrastructure to close the productivity gap that opened with the United States. For China, it means rebalancing economic activity towards consumption. For the United States, it means pursuing fiscal consolidation.
From that perspective, some recent developments may be modestly encouraging. Domestic policies are moving in the right direction as China and the euro area increase fiscal support and public investment. Under our April 2025 reference forecast, global balances are likely to start narrowing again. But the risks remain firmly to the downside. Public deficits in the United States remain excessively large, and the recent broad depreciation of the Chinese yuan -together with the US dollar- runs the risk of widening current account surpluses in China.
In a stark contrast, our report shows that higher tariff barriers in deficit countries like the United States only have a minor impact on global imbalances. This is because tariffs act as a negative supply shock in the tariffing countries. They reduce both investment, which is less profitable, and savings to smooth the income shock—leaving current account balances little changed.
Meanwhile, the ongoing reset of longstanding economic norms could have an impact on the international monetary system, defined as the set of rules, institutions and mechanisms that govern how countries conduct cross-border financial transactions. A well-functioning IMS remains critical to helping prevent the build-up of financial vulnerabilities and addressing existing ones.
As chapter two of the ESR documents, a defining trait of the IMS has been the continued centrality of the US dollar over the last 80 years, despite momentous changes such as the collapse of the Bretton Woods system in 1973, the end of the Cold War in 1991 and the creation of the euro in 1999.
Throughout, the dominance of the dollar has endured or even strengthened, benefiting from interlocking network externalities between its uses as a vehicle currency for international trade and finance, as a benchmark currency for exchange rate stabilization and reserve holdings, and the unparalleled liquidity and safety of US Treasury securities.
This dominance helped sustain global demand for dollar reserve assets. On the one hand, this has allowed the US to borrow more and at lower cost, generating sizable excess returns on external claims relative to external liabilities (the “exorbitant privilege” of the dollar). But it has also increased the exposure of the US external position to global risk –with the US offering insurance against these global shocks to the rest of the world (“exorbitant duty”).
Our report further documents a growing asymmetry in global trade and financial networks. Under the umbrella of a stable dollar-centered IMS, countries have been able to deepen their specialization in trade or finance. For instance, between 2001 and 2023 China and the United States present opposite patterns with China becoming increasingly central in the international trade network but playing only a modest role in the global finance network, while the United States maintained the dominant role in finance rather than in trade.
Despite the ongoing stability of the IMS and continued dominance of the US dollar, a few recent developments warrant close monitoring.
First, while global imbalances are resurfacing, geopolitical considerations are increasingly shaping bilateral trade, direct investment and portfolio flows, reducing direct interactions between more geopolitically distant jurisdictions. Ultimately, this could open the way for a fragmented multipolar IMS. While it is debatable whether an integrated unipolar or integrated multipolar system would be more beneficial to the global economy—history provides little guidance and theory is ambiguous—a fragmented multipolar IMS would almost surely be less desirable than an integrated one, with a potential for increased global financial volatility and greater misallocation of resources.
Second, the recent escalation of trade tensions coupled with the threat of possible financial tensions, rising US debt levels and a softening of the US exorbitant privilege may have caused some global investors to reassess the extent of their dollar exposure. So far, markets developments have been orderly, with an increase in demand for dollar hedging and an 8 percent depreciation of the US dollar since January, the largest half-year decline since 1973, albeit after the multi-decade high of 2024.
Third, digital innovation for cross border transactions, such as the rise of US dollar stablecoins, could reinforce dollar dominance but could also create financial stability risks.
Our report shows that the IMS is stable, and the dollar continues to be dominant, even as external positions in major countries are diverging significantly. While the risks of serious dislocation in the IMS appear moderate, rapid and sizable increases in global imbalances can generate significant negative cross-border spillovers. They require a concerted effort towards rebalancing by surplus and deficit countries alike.
Countries should continue to enhance their resilience by strengthening domestic macroeconomic fundamentals, including building fiscal space and fostering sound policy frameworks. A major risk for the global economy is that countries will instead respond to rising imbalances by further raising trade barriers, leading to increased geoeconomic fragmentation. And while the impact on global imbalances will remain limited, the harm to the global economy will be long-lasting.