Unwinding global imbalances

Current account imbalances are back at the centre of global policy debates, as persistent surpluses and deficits interact with trade tensions and external vulnerabilities. This blog shows that imbalances mainly reflect differences in saving behaviour, and that reducing them will require tailored domestic reforms in both deficit and surplus economies. By Erik Frohm, John Hooley, Fatih Ozturk, Łukasz Rawdanowicz and Nivetha Sivakumar, OECD Economics Department Global imbalances have widened and remain persistent Current account balances are at the forefront of global discussions, including this year’s G20 and G7 meetings. Renewed attention reflects persistent external positions across major economies, increasing trade tensions and widening net international investment positions (NIIPs). A current account balance records an economy’s transactions with the rest of the world in goods, services, income and transfers. A surplus means an economy saves more than it invests domestically; a deficit means it invests more than it saves and draws on net foreign financing. Current account balances are therefore shaped by the saving and investment decisions of households, firms and governments. Persistent current account positions can be problematic when they reflect policy distortions or unsustainable saving-investment patterns, especially if deficit economies become vulnerable to shifts in foreign financing or larger external balance sheets amplify risks. Current account positions narrowed after the global financial crisis but have edged up again since the COVID-19 pandemic. Their broad composition has changed little over three decades. The United States has run persistent deficits, while China and many EU Member countries have generally recorded surpluses (Figure 1). NIIPs have widened alongside these developments, with recent movements driven more by valuation effects and nominal GDP growth than by current account flows. Saving behaviour explains much of the divide The saving-investment perspective helps explain why current account positions persist. The main difference between surplus and deficit economies lies in saving rather than investment (Figure 2). Surplus countries have consistently recorded higher saving rates than deficit countries. Sectoral patterns reinforce this picture: deficit economies tend to have lower government and household net saving than surplus economies. Since the pandemic, many economies have also seen higher private-sector net saving and lower public-sector net saving, partly reflecting the legacy of extraordinary fiscal support. Trade and industrial policies can affect specific sectors or products, but they do not fully explain overall current account positions. Evidence that industrial policy can durably improve current account balances is limited, partly because comparable data on government support is scant. In general, industrial policy is unlikely to shift current accounts unless other distortions also prevent adjustment, such as limits on consumption or capital flows (IMF, 2026; Cesa-Bianchi et al., 2026). Current account adjustments are asymmetric Past episodes of current account adjustment provide guidance on how today’s imbalances may narrow (Frohm et al., 2026). New analysis identifies 70 large and durable current account adjustment episodes across 51 countries between 1980 and 2024. More than three-quarters involved narrowing rather than widening imbalances. Deficit narrowing is typically associated with stronger export growth, some import compression, real exchange rate depreciation and higher private saving-investment balances, especially among non-financial corporations. It also tends to occur alongside tighter fiscal and monetary conditions and a temporary weakening in output gaps. Surplus narrowing is more often associated with higher imports and stronger domestic demand, with lower net lending across households, firms and government (see Figure 3). These episodes are accompanied by real exchange rate appreciation, higher inflation, fiscal loosening and lower long-term real interest rates, without clear evidence of a large loss of export competitiveness. Initial conditions also matter. Larger initial imbalances, especially deficits, are associated with a higher probability of subsequent narrowing, consistent with some mean reversion despite high persistence. By contrast, NIIPs and banking crises do not help predict the onset of adjustment episodes in the sample of countries analysed. Reforms with domestic objectives would also narrow external imbalances There is no precise threshold at which current account positions become excessive or at which they raise the risk of disorderly adjustment. Empirical benchmarks are useful, but measurement challenges, modelling uncertainty and hard-to-observe policy distortions limit their precision. Reforms grounded in domestic economic and social objectives can also help narrow external balances. In deficit economies, fiscal consolidation can support adjustment where public deficits are large. In surplus economies, stronger social safety nets, deeper financial markets and structural reforms that support productivity growth and domestic investment can reduce excess saving. Actions by the economies contributing most to global current account imbalances would be particularly impactful. In China, expanding social protection and improving access to public services could reduce precautionary saving and support consumption. In the United States, narrowing the large structural fiscal deficit would address an unsustainable fiscal trajectory. In Europe, mobilising high saving towards productive domestic investment requires stronger capital markets, fewer barriers to firm growth and high-quality public investment where fiscal space allows. References: Cesa-Bianchi, A. et al. (2026), “Rethinking global imbalances: drivers, risks, and policy priorities”, Bank of England Staff Discussion Paper, https://www.bankofengland.co.uk/-/media/boe/files/paper/2026/rethinking-global-imbalances.pdf Frohm, E. et al. (2026), “Current account imbalances, facts, drivers, and policy challenges”, OECD Economics Department Working Papers, No. 1869, OECD Publishing, Paris, https://doi.org/10.1787/d755aa59-en. IMF (2026), “Understanding Global Imbalances”, IMF Policy Papers, Vol. 006, https://doi.org/10.5089/9781484335956.007 . Discover more from ECOSCOPE Subscribe to get the latest posts sent to your email.