He said global growth will probably slow to a more sustainable pace but warned that this could be jeopardized if countries don't take policy action to deal with current account imbalances.
"The withdrawal of liquidity is completely appropriate, given that the global economy is now likely not too far away from the limits of its capacity," Dodge said. "Thus it seems very likely that global growth will slow to a more sustainable pace."
Dodge made the remarks in a prepared speech that he will delivered to the Chile-Canada Chamber of Commerce in Santiago. The text of the speech was released ahead of time under embargo to reporters in Ottawa.
Dodge said there is a possibility that global growth will slow more sharply than desired if the issue of the huge and persistent US current account deficit, which is mirrored by large surpluses in Asia and in many oil-exporting nations, isn't resolved in an orderly manner.
"The global economy could suffer if policy actions are not taken to deal with global imbalances," he said.
It isn't the first time Dodge has issued the warning. He has repeatedly spoken about the threat posed by a disorderly adjustment of global imbalances.
Canada's central bank governor said the US economy needs to reduce its domestic demand to lower its current account deficit to sustainable levels, and other countries have to pick up the slack.
"Specifically, it is important that China and the economies of emerging Asia take steps to reduce their savings by strengthening household demand." Dodge said.
He said it's crucial for financial markets to remain confident that policy-makers are serious about putting the right policies in place for the current account imbalances to be resolved smoothly.
"My main concern is that if we don't make more progress in implementing the right policy, then we run an increased risk of global financial instability," he said. This could spill over into world trade and lead to a dramatic decline in global growth, he added.
Dodge said policy-makers should aim to encourage efficiency and flexibility in their economies, especially in the financial sector.
He said a flexible exchange rate, like in Canada, helps an economy to adjust to shocks, but acknowledged that large movements can make it tough for particular sectors.
He said it can be harder for policy-makers to keep following the right policies "when some important economies" circumvent "the rules of the game."
Dodge said policy-makers have to be vocal in resisting calls for protectionism in international trade.
"Unfortunately, progress on trade appears to be stalled, and protectionism is a real and rising threat," he said.
Dodge said the International Monetary Fund has to be renewed and modernized, and dedicated to promoting a well-functioning, market-based international financial system.
"We need an IMF where all members commit to playing by the rules of the game - a set of guidelines for policies that best support a market-based international financial system," he said. (Dow Jones)
