Global imbalances: Flows narrow, stocks widen
As global current account - or 'flow' - imbalances wane, net creditor
and debtor positions - 'stock imbalances' - have diverged further,
according to a new study released in the IMF's World Economic Outlook.
Flow imbalances have narrowed substantially since their peak in 2006
diluting their concentration, reducing the size of systemic deficit and
surplus and, therefore, diminishing concerns about these imbalances. But
stock imbalances have continued to widen leaving some debtor economies
vulnerable.
In the process, a new constellation of current account deficits and
surpluses has emerged. The large US deficit shrank by almost two-thirds
as a percent of world GDP, and some European economies that had had
large deficits moved to small surplus positions.
In the meantime, advanced economy commodity exporters and major
emerging market economies (Brazil, India, Indonesia, Mexico, and
Turkey), some of which had run surpluses in 2006, moved to be among the
largest deficit economies in the world in 2013.
Among large surplus economies, China's surplus almost halved in
relation to world GDP and Japan's almost disappeared. Oil exporters and
northern European economies, by contrast, increased their already large
surplus positions.
While large surpluses present fewer systemic risks than deficits do,
they too can be problematic if they arise in a world of deficient
aggregate demand - which has been the case since the global financial
crisis.
The research finds that much of the reduction in flow imbalances was
driven by expenditure reduction in deficit economies after the global
financial crisis and by growth differentials related to the faster
recovery of emerging markets and commodity exporters after the Great
Recession compared with that of advanced economies.
Corrective movements in real exchange rates played a surprisingly
limited role, with few exceptions (China and the United States being two
important ones) and hence so has expenditure switching - that is,
changes in an economy's expenditure on foreign and domestic goods and
services.
Factors that have acted against anticipated exchange rate realignment
include changes in investor sentiment (flows to safe havens after the
crisis) and the fact that the euro area's economic and monetary union
includes large surplus and large deficit economies.
The study noted that much of the observed narrowing in flow
imbalances can be expected to last because the decrease in output due to
subdued demand has likely been largely matched by a decrease in
potential output in most advanced deficit economies. But there is some
uncertainty about it, and there is the risk that flow imbalances will
widen again.
Net creditor and debtor positions have diverged further thanks to
reduced, but not reversed, flow imbalances. Persistently high ratios of
net external liabilities to GDP in some advanced deficit economies also
reflect the low output growth and low inflation.
Given that net foreign assets and liabilities are slow-moving
variables, the composition of large debtors and creditors has shown
striking inertia.
Baseline projections underlying the World Economic Outlook suggest a
further narrowing of flow imbalances together with an estimated further
widening of stock imbalances. Under these projections the evolution of
current account balances and net foreign asset positions suggest a
reduction in external vulnerabilities in the coming years.
Nevertheless, several economies, including a few emerging market
economies, remain vulnerable to shifts in market sentiment or to sudden
increases in interest rates. In addition to the systematically large
debtors, several smaller European economies and some frontier market
economies remain vulnerable over the medium term.
To mitigate these vulnerabilities, debtor economies will ultimately
need to improve their current account balances and strengthen their
growth performance. Stronger external demand and more expenditure
switching would help on both accounts.
Policy measures to achieve stronger and more balanced growth in the
major economies, including in large surplus economies, will also be
beneficial.
- IMF
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