New global imbalances in the aftermath of the crisis
External imbalances widened again in 2015 after narrowing in the aftermath of the global financial crisis. What are the drivers of these developments and what lessons can policy makers draw?
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In the aftermath of the global financial crisis, external imbalances were narrowing and remained fairly stable in recent years. Now, these imbalances are widening again, according to a multilaterally consistent IMF assessment of countries’ external positions, which includes current account balances, real exchange rates, external balance sheets, capital flows and international reserves. The IMF assessment was the 5th edition of the Fund’s annual External Sector Report.
Global flow imbalances increased for the first time since the global financial crisis. Although the rise was moderate, it was accompanied by a reconfiguration of current accounts and exchange rates and occurred despite a sharp reduction in oil surpluses. While Japan, China and the euro area increased their surpluses, supported by improved terms of trade and currency depreciation, the U.S. current account deficit grew facing a steep appreciation of the USD. Shifts were mainly driven by the uneven strength of recovery in advanced economies, a sharp fall in commodity prices with redistributive effects and tighter external financing conditions for emerging markets.
The year 2015 was also characterised by a widening of excess external imbalances. The Fund assessed how current accounts and exchange rates compared relative to fundamentals and desired policies. Countries with external positions deemed stronger than implied by fundamentals, such as Germany or Korea, have remained in that position. At the bottom of the distribution, in key emerging economies and some debtor euro area countries, there has been slightly more progress at narrowing excess deficits.
Persistent imbalances continue to lead to expanding stock imbalances and the implied need for increased vigilance especially facing negative output gaps. The IMF assessment ends with a call for more balanced policy approach with less emphasis on demand-diverting policies and more on demand-augmenting and structural policies.
In the course of the ensuing debate, attention was drawn towards the development of foreign currency reserves, the emphasis on global imbalances in general and the role of Germany’s persistent excess surplus in particular.
The recent decline in foreign-currency reserves was a notable phenomenon in the context of global imbalances following two decades of reserve accumulation. However, major foreign-currency drops such as in China, Saudi Arabia and Russia were offset by private demand and increases in Switzerland, Hong Kong and Singapore. More importantly, changes in reserves did not exacerbate global imbalances but rather had a narrowing effect for example in the case of China.
Germany plays a central role adding to imbalances in Europe and worldwide. The multilaterally consistent analysis showed that lowering Germany’s excess surplus may lead to benefits, among others, in the European periphery. With a roughly balanced output gap and a strong excess surplus, the report’s recommendation to perform fiscal stimulus implies the over-heating of the economy. However, well-targeted, temporary and growth-friendly fiscal easing will enable an internal re-valuation without putting too much strain on the economy.
There was agreement that global imbalances are symptoms of a global economy recovering at an uneven pace and inappropriate policies rather than an issue at its root.
Event notes by Robert Kalcik, Research Assistant
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Chief of Open Economy, Macroeconomics Division, Research Department, IMF
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