Bank of Canada Gov. Tiff Macklem warned on Tuesday that widening global current-account imbalances and the growing influence of nonbank lenders are increasing the risk of a disruptive economic correction, as large capital inflows into the United States stretch valuations and expose the financial system to sudden reversals.
Speaking in Paris at an event hosted by the France-Canada chamber of commerce, Macklem said that large capital inflows into the U.S. could once again be misallocated, “stretching valuations in equities and credit and setting the stage for a painful correction.” Alternatively, he said, those flows could reverse suddenly, sending stress far beyond U.S. borders.
“That leaves us with two clear risks,” Macklem said. “First, large capital inflows into the U.S. could once again be misallocated … Second, those flows could reverse suddenly. Either outcome could send stress far beyond U.S. borders. So the problem is not just that imbalances are widening again. It is also that they are widening in a world where the financial system is now faster, more complex and less transparent.”
Macklem said that a large share of global savings end up in the U.S., or are “pulled disproportionately in one direction.” He called for policy adjustments to encourage increased savings in the U.S., more consumption in China, and a pickup in investment in Europe. “If we want a more balanced and resilient global system, we need to create more places for those savings to go,” he said.
The warning comes as the International Monetary Fund has flagged that a recent rise in excessive current-account deficits and surpluses reflects increasingly unbalanced growth dynamics in China, the European Union, and the United States, carrying the risk of negative cross-border spillovers.
Macklem pointed to the growing influence of nonbank lenders such as hedge funds, pension funds, private-finance companies, and other asset managers as a key complicating factor. He said this has created a financial system that is faster but also more opaque, making it harder for regulators to monitor risks.
This marks the second time this year that Macklem has used a public speech to raise concerns about the nonbank lending sector. In remarks in Toronto in March, he said risks in the private-credit world may be growing faster than policymakers’ ability to understand and mitigate them.
Macklem drew a historical parallel to the last time imbalances widened to dangerous levels — the period leading up to the 2008–2009 financial crisis and global recession. He said that history shows the global economy and financial system eventually adapt and adjust, “but too often, change has come in response to crisis.”
“The question is whether we adapt to a changing landscape — or wait for a crisis to force change upon us,” Macklem said.
The Bank of Canada governor’s speech adds a prominent central-bank voice to a growing chorus of officials urging global policymakers to address structural vulnerabilities in a financial system that has shifted dramatically since the crisis era.