Navigating global imbalances and geo-economic fragmentation

As the discussions in the G7 and G20 have underscored this year, any robust narrative on global imbalances must look beyond the trade channel and fully take into account the financial channel. Current global imbalances are best understood as a financial balance-sheet phenomenon, rather than one driven by trade flows; and imbalances have widened in recent years driven by global capital allocation, rather than solely by traditional savings–investment gaps.

In this context, imbalances are increasingly shaped by developments in asset markets - particularly equity performance - alongside asset price movements, and shifts in portfolio allocation, with important implications for financial stability that warrant close monitoring.

Also, global capital flows are increasingly intermediated by non-bank financial institutions - e.g. asset managers, hedge funds, pension funds and insurance companies. The OECD, as well as other international organisations, have repeatedly pointed to the growing systemic importance of market-based finance and the need to better monitor liquidity mismatches, leverage, and spillovers beyond the traditional banking system.

Current policy challenges include: gaps in the oversight of cross-border flows outside the banking system, and persistent data gaps in tracking financial exposures. At the same time, regulatory frameworks remain largely bank-centric, even as risks have increasingly migrated to the less-regulated non-bank financial sector.

As growing geopolitical tensions, industrial policies, tariffs, and strategic competition continue to reshape the global economy, geoeconomic fragmentation is increasingly influencing the direction, composition, and allocation of international capital flows.

Global capital allocation is becoming increasingly shaped by geopolitical considerations alongside market fundamentals. Cross-border investment decisions are progressively influenced by strategic alignment, national security concerns, sanctions exposure, industrial policy incentives, and efforts to reduce dependence on rival jurisdictions. Fragmentation is contributing to the rerouting not only trade but also financial flows through intermediary economies, the regionalisation of supply chains, and a growing “friend-shoring” or “trust-shoring” of investment and production networks. The role of the US dollar and the structure of the international monetary system also remain central to this debate. While the US dollar continues to dominate global reserves, trade invoicing and international finance, rising geopolitical tensions have accelerated discussions around reserve diversification, alternative payment systems and the resilience of the dollar-based financial architecture. Current policy challenges include: the risk of greater fragmentation of the international financial system, reduced co-operation in global financial governance and persistent data gaps in tracking indirect financial exposures and cross-border intermediation channels.