The IMF on Imbalances: Back to Business as Usual?
The IMF’s near term forecasts, released in the World Economic Outlook this week point the way to a close to V-shaped recovery for the global economy– not withstanding somewhat more restrained growth in the eurozone and UK. Despite the outlook’s subtitle “Rebalancing Growth” and a wonderful chapter on how imbalances might be reduced if the right policies are taken, a quick parse of the mid-term forecasts released alongside on global imbalances points to the risk of a return to business as usual – the bad old world of imbalances. Perhaps the goal of this base case scenario is to spur these policy changes.
The most recent estimates (available in the WEO database) forecast global current accounts out as far as 2015, a difficult task to be sure. They provide an interesting vision of the world in 2015, seemingly a cautionary tale of what might happen if policies to rebalance global demand don’t happen in the medium term. In particular the U.S. deficit and Chinese surplus resume their growth, oil exporters (mostly) begin saving again and the recycling of funds seems set to continue. This is scary stuff, given the role that imbalances and misallocations of capital played in contributing to the financial crisis.
The IMF is forecasting a re-widening of China’s current account surplus to US$759 billion by 2015 (almost double the forecast level of 2010) and the corresponding deficit in the U.S. is expected to widen to US$638 billion. While the U.S. deficit remains shy of the 2006 peak both in dollar value and as a share of US GDP, it is nonetheless very wide, implying that a stabilization in the financial system increases U.S. borrowing and thus imports, while keeping exports restrained.
This forecast would imply that adjustment within China is slim to none. A US$760 billion surplus implies that Chinese domestic demand would not pick up strongly, that Chinese savings rates remain high and presumably that the bilateral U.S.-China trade balance remains an area of concern. Given the expectations of global growth, this sharp pick up in China’s surplus would also imply a take off in exports, particularly as export growth would have to outpace rather expensive imports of commodities. As noted, commodities now make up over 20% of China’s imports. Given the assumption of a US$80+ oil price for the forecast period and high prices of other commodities, it could be hard to have large surpluses in both China and oil exporting economies. In our most recent outlook, released this week, we forecast that China’s surplus will continue to narrow in 2010 from the already low levels of 2009, before possibly widening slightly but we (perhaps optimistically) see more rebalancing given the domestic imperatives to support consumption. Policies have been slow to be implemented but the diminishing marginal returns on investment and uncertain export environment make this imperative. Only time will tell.
The last time China’s trade surplus soared in 2007 and 2008 it was largely due to deepening of the Chinese supply chain at the expense of many of the Asian countries that supplied it components. These countries saw their exports to the U.S. fall while total U.S. imports from Asia was relatively flat. However, this time around, the IMF is suggesting that the surpluses of most of the Asian Tigers will continue to climb. Singapore, Malaysia, Hong Kong and Taiwan have a forecast surplus of US$160 billion in 2015, a gradual increase from the lows of 2009. Perhaps this stems from a concern that with strong growth in these countries, the impetus to reform will be slowed and surpluses will continue to accumulate.
The IMF assumes that the GCC would see a rewidening of its surplus to US$238 billion in 2015. This would contribute to a US$1.2 trillion cumulative surplus from 2010-2015, far outstripping cumulative US$960 billion surplus the region had from 2003-2008 when oil prices steadily climbed and much of the proceeds were saved given limited domestic absorptive capacities. Now with domestic spending on the increase, maintaining such a surplus seems a bit optimistic – even for all but gas-rich Qatar. Domestic spending needs and extensive infrastructure plans suggest that Saudi Arabia’s surplus for one should shrink rather than climb. Given the region’s growth trajectory, these surpluses would be lower as a share of GDP than in 2007 and 2008, but the increase in domestic demand suggests that at least some of the GCC countries would be more apt to follow Russia’s example into a shrinking surplus. Historically rising oil prices get absorbed domestically especially in a country like Saudi Arabia where the young large population need jobs.
The IMF also seems to suggest that Europe’s internal imbalances will not be dissolved in this period. Germany’s savings are set to remain large, roughly similar to the aggregate deficits of Portugal, Italy, Ireland, Greece and Spain at US$132 billion surplus and US$185 billion deficit respectively. This would keep the EMU balance at close to zero, but implies that the divergences my RGE colleagues have pointed out remain a key concern and obstacle to the region’s growth.
However, the forecasts do not just imply more of the same. To some extent there is a dispersion of imbalances. Countries like Brazil, India, Canada and Australia have all shifted into deficit driven by stronger domestic demand, stronger domestic currencies, increasing capital imports and a weaker export environment. They are set to stay in deficit and in some cases (Australia) to have a significantly widening deficit.
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