The global constellation of imbalances has “rotated” into a new pattern, now with larger deficits in a number of emerging market economies (photo: Larry Williams/Corbis)
MULTILATERAL SURVEILLANCE
The 2014 Pilot External Sector Report (ESR), the third annual exercise of its type, analyzes recent developments and provides updated staff assessments of economies’ external positions—including current account balances, real exchange rates, external balance sheets, capital flows and international reserves.
Covering 28 of the world’s largest economies plus the euro area, the ESR comprises two papers:
• An overview paper emphasizes multilateral aspects and issues, showing how the individual economies fit into the global picture, and the need for policies to reduce global imbalances.
• A set of individual external assessment write-ups, one for each economy. These assessments, which emphasize the impact of policies, draw in part on estimates from the recently-developed Pilot External Balance Assessment methodology.
The essence of the ESR exercise is the combination of multilateral and individual economy perspectives, according to Steve Phillips, who chaired the inter-departmental group that produced the report. “Since any economy’s external position—its current account balance, its balance sheet, its exchange rate—is the counterpart of all other economies’ positions, it can’t be assessed in isolation,” says Phillips. “The ESR exercise, including the preparation of these two papers, is how the Fund staff work together to produce a coherent picture.”
New patterns of imbalances
This year’s report points to some good news but also to some less satisfactory developments.
The most positive note comes from looking at global imbalances—that is, the sums of the current accounts of all economies with surpluses, and of all those with deficits. Such imbalances today are much below their all-time peak recorded in 2006. And, while progress in reducing imbalances seemed to stall in 2011 and 2012, imbalances overall came down in 2013.
But the report finds that global imbalances remained too high in 2013, identifying what it calls “excess imbalances.” Economies are not expected to have balanced, nor constant, current accounts; the staff assessments are with respect to norms that allow for the effects of country-specific fundamentals, appropriate policies, and temporary influences. Even after such allowances, external imbalances overall are about double what the staff-assessed norms would total.
Looking at individual economies covered by the report, current account imbalances appear wider than desirable, according to staff-assessed norms, in a number of cases, including for example Germany, Korea and Singapore on the surplus side, and Turkey on the deficit side. As for recent progress, the picture is mixed: in 2013, Malaysia and Spain for example continued making significant progress in reducing their imbalances. But excess imbalances widened in Korea and Turkey in 2013, and a new gap emerged in Russia, where the current account surplus fell below the staff-identified norm.
The ESR emphasizes that the global constellation of imbalances has “rotated” into a new pattern. Over the years, the deficits of the U.S. and a number of euro area member economies have narrowed, while the surpluses of China and Japan also narrowed. But the story is not simply one of a general shrinking of imbalances. Especially in the last few years, progress on the side of excess surpluses mostly has stalled, and the reduction of some economies’ deficits has been joined by the expansion of others’ deficits. The new configuration of imbalances—now with larger deficits in a number of emerging market economies—points to changing policy priorities and potential risks going forward.
Policy adjustments needed on both sides
The staff assessments of external positions—which take account of the impact of policies on current accounts and exchange rates, to the extent possible—in turn point to the value of future policy action on the part of many economies.
The appropriate policy actions that would support narrowing excess imbalances vary from case to case, as set out in the ESR papers. In broad terms, they include medium-term fiscal consolidation, limiting financial excesses, and implementing structural reforms to facilitate adjustment in deficit economies; and various policies that support stronger domestic demand in surplus economies. In some surplus economies, policy adjustments include moving toward more market-based exchange rates, avoiding one-sided foreign exchange market policies and reducing restrictions on capital flows over time.
The ESR underscores the need for action by both those with excess surpluses and those with excess deficits. Imbalances are linked across economies, with each reflecting a mix of domestic and foreign influences; the total excess deficits and surpluses identified by the ESR are matched reflections of each other. Clearly, the problem of global imbalances and its solution are joint matters. Policy adjustments by deficit and surplus economies together would be mutually supporting, not only in reducing imbalances but with benefits for global growth and stability.
