Bank of Canada Governor David Dodge said that the strong global growth of recent years is beginning to slow to a more sustainable pace, and the right economic policies can help the process unfold smoothly.

Dodge made the remarks in a speech today to the Chile-Canada Chamber of Commerce. He noted that global growth has been rooted primarily in the economic strength of the United States and emerging Asia, but that the resulting global current account imbalances are now a concern.

Growth has also been supported by central banks around the world injecting a lot of liquidity into the global economy, he said. “Clearly, this liquidity helped to encourage the strong growth of recent years. But now, central banks are in the process of removing some of it,” Dodge noted. “This withdrawal of liquidity is completely appropriate, given that the global economy is now likely not too far away from the limits of its capacity. Thus, it seems very likely that global growth will slow to a more sustainable pace.”

Ideally, this slowdown would take place in a relatively smooth way, Dodge said. “But there are a number of risks surrounding this scenario, and there is a possibility that global growth will slow more sharply than desired, to the detriment of our two economies.”

The most important risk has to do with the way global imbalances are ultimately resolved, Dodge said. “It is crucial that financial markets remain confident that policy makers are serious about putting the right policies in place to allow for a smooth resolution of imbalances,” he added.

All countries need to follow appropriate domestic policies — structural reforms to encourage economic flexibility and efficiency, as well as a sustainable fiscal policy and a sound monetary policy based on low and stable inflation, he added.

It’s important that governments around the world support free trade in goods and services and resist protectionism, said Dodge. We also need “to make the international financial system as efficient and effective as possible,” and that should include modernizing the IMF, he noted.