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Global imbalances

International Monetary Fund
Wednesday, August 02, 2017

THE International Monetary Fund has just released its latest assessments of external positions for the 29 largest economies.

As discussed in this year's External Sector Report, excess current account imbalances, that is, those beyond the levels warranted by country fundamentals, were broadly unchanged in 2016. They represented about one-third of total actual surpluses and deficits, with only small shifts in 2016.

Since 2013, however, there has been a rotation of these excess imbalances toward advanced economies, posing new risks and policy challenges.

On the bright side, excess imbalances narrowed in key emerging market economies, led by a smaller excess surplus in China and smaller excess deficits in others key economies (such as Brazil, Indonesia, South Africa, and Turkey), where policies supported external adjustment as prospects of US monetary policy normalisation became more evident and external financing conditions tightened.

But this has been accompanied by a widening of excess imbalances in several advanced economies and the continuation of large and persistent excess surpluses in others (e.g., Germany, Korea, the Netherlands, Singapore, and Sweden), an issue that we explore in detail in the report.

Our historical analysis suggests that these large and persistent surpluses, outside oil-exporting countries and financial centers, are a fairly recent phenomenon and in the few cases where they reversed, policy actions on multiple fronts played a role.

What do these developments mean for economic policy?

The current constellation of excess imbalances-especially the persistent surpluses in the same group of countries and the resurgence of deficits in key debtor economies-indicate that automatic adjustment mechanisms are weak.

That is, prices and saving and investment decisions are not adjusting fast enough to correct these excess imbalances.

This partly reflects rigid currency arrangements but also structural features (like inadequate social safety nets and barriers to investment) which lead to undesirable levels of saving and investment in some economies. This calls for more forceful policy action.

While the increased concentration of excess deficits in advanced economies-mainly the US and UK could reduce deficit-financing risks in the near term, it could pose other downside risks if unaddressed, especially over the medium term.

The concentration of deficits in a few countries raises the likelihood of protectionist measures. And the continued reliance on demand from debtor countries risks derailing the global recovery, while raising the chances of a disruptive adjustment down the road.

Given these risks, addressing external imbalances in a way that is supportive of global growth is a shared responsibility.

It requires a recalibration of the policy mix in deficit and surplus economies alike.








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