## ch1 - 2021. Overall services trade, which comprises about ## Source details **Canonical URL:** [ch1 - 2021. Overall services trade, which comprises about](https://www.imf.org/-/media/files/publications/esr/2021/english/ch1.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2021/english/ch1.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2021/english/ch1.pdf.json) --- ### Overall services trade and global trade impacts - Services trade, which comprises about one-fifth of global trade, contracted by 17.7 percent in 2020. - The July 2021 WEO Update forecasts only 5.8 percent growth in 2021, implying a wide shortfall compared with the pre-pandemic path. - Hard-hit tourism-dependent economies experienced sharply reduced trade balances due to the external travel shock (Box 1.1). - Global trade in goods recovered to pre-pandemic levels amid rising economic activity and commodity prices, while services trade, including tourism, remains subdued. - Shipping costs increased since mid-2020, particularly for containers. ### Fluctuations in currencies, capital flows, and currency reserves - Currency movements and reserves: - Reserve currencies appreciated during the flight to safety at the onset of the crisis, but most have depreciated since mid-March 2020 amid exceptional policy support and positive vaccine news. - Some emerging market and developing economy currencies that depreciated early in the crisis have rebounded; some (for example, Argentina and Turkey) saw continued pressures and declining foreign exchange reserves in 2020, although reserves have in some cases increased somewhat thus far in 2021. - Some advanced economies, such as Singapore and Switzerland, have had reserve accumulation in the context of appreciation pressures. - Foreign direct investment (FDI) and other flows: - FDI flows to emerging markets have been less affected than other types of flows—especially compared with nonresident portfolio flows—mainly reflecting inflows to Asia. - In advanced economies, FDI flows declined in 2020, reflecting drops in intra-firm flows and corporate restructuring. - Several emerging market and developing economies sold foreign currency reserves during the sudden stop in early 2020 but rebuilt buffers later when capital flow pressures subsided. - Other investment net flows more recently declined, driven by Chinese banks increasing overseas deposits and lending operations. - Portfolio flows to emerging markets have rebounded since the spike in the VIX in March 2020. - International reserves declined in early 2020 but have generally rebounded since then. ### Fluctuations in current account balances and sectoral drivers - Current account balances: - Deficits and surpluses exhibited wider fluctuations in 2020 than in recent years, driven by exceptional sectoral shocks with asymmetric effects across economies. - About 66 percent of the movement of current account balances for major economies is explained by the sum of COVID-19–related factors (Figure 1.5; Annex 1.1 quantifies impacts). - Sectoral drivers and effects: - Travel shock: - Sharp decline in tourism arrivals led to significantly lower travel services and current account balances for Spain, Thailand, and Turkey and even larger declines for smaller tourism-dependent economies. - Counterpart declines included smaller rises in travel services balances across numerous net importers of travel services (for example, China, Germany, and Russia). - Oil trade shock: - Collapse in oil demand and energy prices early in the crisis was relatively short-lived; oil prices recovered in the second half of 2020. - Oil-exporting economies saw current account balances decline sharply (Russia and Saudi Arabia, among major economies, also due to production cuts), with corresponding increases in oil trade balances across many net oil-importing economies. - Trade in medical products: - Demand for medicine, medical supplies and equipment, and personal protective equipment affected imports and exports and intermediate inputs used in medical goods production. - Shift in household consumption composition: - Pandemic shifted household consumption from services toward consumer goods, especially in advanced economies, with increased preference for durables (cars and electrical appliances) to accommodate teleworking and virtual learning. - In emerging market and developing economies, the shift was less pronounced and mainly offset by increased consumption share of nondurables. - The shift is expected to be transitory, driven by the pandemic and lockdowns, involving some purchases that depreciate slowly (such as home office equipment). - Additional idiosyncratic factors: - Some economies with large FDI liabilities experienced sharp increases in income balances and current accounts due to lower dividend payments to foreign investors (for example, Australia, Poland, and South Africa). - Increased global demand for gold led to sharp increases in gold imports (Switzerland) and exports for gold producers (South Africa). - Remittance flows declined sharply in early 2020 for economies such as India and Mexico, but remittances have since recovered faster than anticipated and became an important consumption smoothing mechanism for recipient households. ### Unequal impacts across income groups and saving–investment balances - Income and current account forecast errors: - In 2020 poorer economies saw, on average, larger unexpected increases in their current account balances than did richer economies, compared with pre-pandemic forecasts. - A doubling in income per capita is associated with more than a 1 percentage point of GDP reduction in the current account balance compared with pre-pandemic forecasts (see Online Annex 1.2). - Regression result: slope coefficient in ΔCA_i = α + β Sum of COVID-19 Factors_i + ε_i (30 economies with ESR assessments) is −1.05 (R-squared of 66 percent). Excluding China and the United States decreases the coefficient to −0.99. - Fiscal expansion and private saving: - Unprecedented fiscal expansion affects current account balances; effects depend on a country’s relative fiscal policy stance compared with that of its trading partners (for economies with relatively limited fiscal expansions compared with trading partners, consequences include a rise in current account balances, such as in Mexico). - The fall in public saving–investment balances in richer economies has been partly offset by higher private saving–investment balances, which have increased in most economies but by more in richer ones. - The rise in private saving–investment balances mainly reflects record household saving rates in advanced economies due to lockdown-induced consumption reductions, saving of government transfers, and precautionary motives. - Corporate saving movements have been relatively modest, reflecting offsetting effects of falling profits and government support to companies. ### Remittances and social protection - Remittances were resilient in 2020 and early 2021, with most sampled emerging market and developing economies experiencing a sustained increase since May 2020 that reversed the initial decline. - Evidence: Kpodar and others (2021) find remittances were greater in migrants’ home economies with higher COVID-19 infection rates, underlining remittances’ role in global social protection. ### Quantitative aggregates and selected figures - Global Current Account Balance (memorandum, Billions of US Dollars): - 2018: 2,590 - 2019: 2,477 - 2020: 2,736 - 2021 Projection: 3,141 - Percent of world GDP: 2018: 3.0; 2019: 2.8; 2020: 3.2; 2021 Projection: 3.4 - Overall Surpluses (Billions of US Dollars): - 2018: 1,453 - 2019: 1,388 - 2020: 1,497 - 2021 Projection: 1,742 - Percent of world GDP: 2018: 1.7; 2019: 1.6; 2020: 1.8; 2021 Projection: 1.9 - Overall Deficits (Billions of US Dollars): - 2018: −1,136 - 2019: −1,049 - 2020: −1,135 - 2021 Projection: −1,394 - Percent of world GDP: 2018: −1.3; 2019: −1.2; 2020: −1.3; 2021 Projection: −1.5 ### Net International Investment Positions and valuation effects (selected) - United States NIIP (Percent of GDP): 2017: −39.0; 2018: −46.9; 2019: −51.6; 2020: −67.3 - Germany NIIP (Percent of GDP): 2017: 59.0; 2018: 60.8; 2019: 71.4; 2020: 76.3 - Japan NIIP (Percent of GDP): 2017: 59.1; 2018: 60.2; 2019: 63.5; 2020: 66.3 - China NIIP (Percent of GDP): 2017: 16.8; 2018: 15.2; 2019: 16.0; 2020: 14.5 - Valuation drivers: - The United States experienced the largest valuation losses in percent of GDP, mainly from asset price valuation losses tied to domestic stock price increases affecting US external equity liabilities. - Turkey experienced large currency-induced valuation losses, particularly on debt, driven by large lira depreciation. - Brazil had currency-induced valuation losses on external debt positions, offset by gains on equity positions and asset prices. - South Africa experienced large net foreign valuation gains due to declining asset price valuations. ### Current Account Forecast Errors and global balances - Global current account deficits and surpluses widened in 2020 compared with 2019 and are set to widen further in 2021. - Sectoral COVID-19 factors explain the entire widening in global current account balances in 2020; net of these factors, the global current account balance in 2020 is slightly lower than in 2019. - Forecasts underpinning the July 2021 WEO Update imply a gradual decline in global current account balances during 2022–26, reaching 2.5 percent of world GDP by 2026. - Projected changes for selected major economies (percent of GDP unless otherwise noted): - United States: current account deficit of 3.7 percent of GDP in 2021, up from 2.2 percent of GDP in 2019; deficit expected to start declining in 2023, falling below 3 percent of GDP in the medium term. - Euro area: current account surplus projected to increase by 0.6 percent of GDP to 2.8 percent of GDP in 2021 and remain near that level in the medium term. - Japan: current account surplus projected to widen by 0.3 percent of GDP to 3.6 percent of GDP in 2021, before stabilizing at just above 3 percent in the medium term. - China: current account surplus projected to decline by 0.2 percentage point of GDP to 1.6 percent of GDP in 2021, and converge toward about 0.5 percent of GDP over the medium term. - Other EMDEs: current account balances projected to decline as domestic demand recovers in India, Indonesia, Mexico, Poland, South Africa under current policies. ### External Balance Assessment (EBA) and IMF staff assessments - EBA produces multilaterally consistent, cyclically adjusted current account norms that depend on country fundamentals and desirable policies. - IMF staff combine EBA numerical inputs with country-specific judgment and COVID-19 adjustors to produce multilaterally consistent assessments for 29 largest systemically important economies and the euro area. - Classification of economies by external positions vs. fundamentals (2020): - Moderately stronger, stronger, or substantially stronger (9 economies): Germany, Malaysia, The Netherlands, Poland, Sweden, Thailand, Singapore, Mexico, Russia. Mexico and Russia entered this category in 2020. - Moderately weaker or weaker (9 economies): Argentina, Belgium, Canada, France, Saudi Arabia, South Africa, the United Kingdom, the United States, Turkey. Turkey entered this category in 2020. - Broadly in line (12 economies): Australia, China, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Spain, Brazil, the euro area, Switzerland. Switzerland entered this category in 2020. - Global excessive imbalances: - Broadly unchanged in 2020 at about 1.2 percent of world GDP. - Sum of absolute headline current account balances rose by 0.4 percentage point of world GDP to 3.2 percent of world GDP. - About 70 percent of excess balances in 2020 pertained to advanced economies. - Largest contributors to lower-than-warranted current account balances (as a share of world GDP): United States, France, the United Kingdom, Canada. - Largest contributors to larger-than-warranted current account balances: Germany, The Netherlands, Mexico, Poland, Russia. ### Box 1.5 — Ending the Pandemic (policy priorities and financing) - Ending the pandemic is a precondition for lasting recovery, avoiding divergence between richer and poorer economies, and reducing long-term damage to services trade. - Key actions and supports: - Up-front financing and vaccine donations and investments to diversify and increase vaccine production to handle downside risks, including from new virus variants (Agarwal and Gopinath 2021). - Grants, national government resources, and concessional financing to pay for investments, testing and tracing, therapeutics, and public health measures where vaccine coverage is low. - Fiscal policy should remain supportive until the recovery is firmly in place, conditional on available space, with programs targeted at most affected sectors, aided by monetary accommodation, where possible. - Facilitate a synchronized global investment push, ensuring financially constrained economies have adequate access to international liquidity—this could hasten recovery and convergence with limited effects on global current account balances. - IMF proposal: a General Allocation of Special Drawing Rights (SDRs) equivalent to US$650 billion to ease constraints for financially constrained economies. - Implement clear health and safety protocols to promote return to contact-intensive sectors, including travel and tourism. - Ensure remittance resilience through timely data and lowering costs via incentives to remittance service providers and supporting innovative technologies (World Bank 2021). ### Managing external shocks, capital flows, and trade tensions (policy guidance) - Preparatory policy actions during favorable financing: - Improve debt composition by extending maturities and locking in historically low interest rates. - Reverse departures from sound public debt management that may have occurred during the pandemic. - If external shocks materialize: - Economies with flexible exchange rates should allow adjustments where feasible. - Economies with adequate reserves may use exchange rate intervention to alleviate disorderly market conditions and limit financial stress. - Capital flow management measures: - Inflow measures can help manage surges in certain circumstances, together with macroprudential tools, when policy space is limited; such measures should be transparent, temporary, targeted, and avoid discrimination by residency. - In imminent crisis circumstances, outflow measures could be used as part of a broad package, provided they are broad-based, tightly enforced, transparent, temporary, and do not substitute for warranted macroeconomic and structural policies. - Resolving trade tensions and trade policy recommendations: - Avoid export curbs on vaccines and vaccine ingredients; roll back restrictions to trade; strengthen the rules-based multilateral trade system. - Collaborate on phasing out tariff and nontariff barriers to trade, including medical equipment and supplies. - Modernize multilateral rules to address technology transfer policies, farm and industrial subsidies, digital trade, international taxation, and measures to limit cross-border profit-shifting. - Restore an effective WTO dispute settlement system. ### Box 1.4 — Alternative scenarios (G20 Model): downside and upside - Downside scenario: a new COVID-19 wave in emerging markets with additional financial tightening and scarring - Assumes new, more infectious variants generate an additional upsurge in infections in emerging market economies in late 2021 with gradual vaccine supply increases, mandated and voluntary mobility restrictions, slower growth in late 2021 and a more notable slowdown in 2022. - Financial tightening: faster monetary policy normalization in advanced economies plus investor concerns cause tightening in financial conditions in many emerging markets. - Real and external effects for emerging markets: currency depreciation and a sharp contraction in imports peaking at –8 percent in 2022; export capacity contracts by less than imports, increasing current account balances for emerging markets. - Advanced economies: negative spillovers depress exports and reduce current account balances. - Broader implication: exacerbates unequal recovery and slows capital flows from richer to poorer economies. - Upside scenario: faster vaccine distribution, particularly in emerging markets - Faster normalization of mobility in late 2021 and into 2022, allowing reopening of high-contact sectors. - For emerging markets: import demand rises by about 3 percent by 2022; exports rise by about 2 percent; current account balances decline and capital flows from richer to poorer economies strengthen. - Advanced economies: export gains as global activity strengthens. ### CHAPTER 1 — 2020 Individual Economy Assessments: summary policy recommendations (selected) - Argentina — Overall 2020 Assessment: Weaker - Implement growth-friendly fiscal consolidation and prudent monetary policies; rebuild international reserves; introduce reforms to strengthen competitiveness and export capacity. - China — Overall 2020 Assessment: Broadly in line - Accelerate structural reforms (open domestic markets, reform SOEs, ensure competitive neutrality), reduce high household savings by strengthening social safety net, promote green investment, and further increase exchange rate flexibility. - Germany — Overall 2020 Assessment: Stronger - Pursue growth-oriented fiscal policy with greater public sector investment in digitalization, infrastructure, and climate mitigation; implement structural reforms to foster entrepreneurship; introduce additional tax relief for lower-income households; adopt pension reforms. - Mexico — Overall 2020 Assessment: Stronger - Implement structural reforms to deliver stronger investment and inclusive growth; implement credible medium-term tax reform; continue floating ER as main shock absorber. - Saudi Arabia — Overall 2020 Assessment: Moderately weaker - Implement further consolidation, energy price reforms, and restraint of current spending; pursue structural reforms to diversify the economy and boost the non-oil tradable sector. - Turkey — Overall 2020 Assessment: Moderately weaker - Rein in credit growth; commit to and deliver firm monetary policy to lower inflation and increase credibility; enhance fiscal anchor and build reserves. - United States — Overall 2020 Assessment: Moderately weaker - Use fiscal space to increase infrastructure investment and facilitate transition to lower-carbon economy in near term and embark on fiscal consolidation in medium term; implement structural policies to increase competitiveness and roll back tariff barriers. *Source: IMF staff calculations and assessments as presented in the 2021 External Sector Report, Chapter 1.* ### 2021. Overall services trade, which comprises about ### ch1 - 2021. Overall services trade, which comprises about ### Overall services trade and global trade impacts - Services trade, which comprises about one-fifth of global trade, contracted by 17.7 percent in 2020. - The July 2021 WEO Update forecasts only 5.8 percent growth in 2021, implying a wide shortfall compared with the pre-pandemic path. - The external travel shock has sharply reduced the trade balances of hard-hit tourism-dependent economies (Box 1.1). - Global trade in goods has recovered to pre-pandemic levels amid rising economic activity and commodity prices, while services trade, including tourism, remains subdued. - Shipping costs increased since mid-2020, particularly for containers. ### Fluctuations in currencies, capital flows, and currency reserves - Currency movements mirrored shifts in global financial conditions during the COVID-19 crisis: - Reserve currencies appreciated during the flight to safety at the onset of the crisis, but most have depreciated since mid-March 2020 amid exceptional policy support and positive vaccine news lifting global risk sentiment. - Emerging market and developing economy currencies that depreciated early in the crisis have, in many cases, rebounded; some emerging markets with external vulnerabilities saw continued pressures and declining foreign exchange reserves in 2020 (for example, Argentina and Turkey), although reserves have in some cases increased somewhat thus far in 2021. - Some advanced economies, such as Singapore and Switzerland, have had reserve accumulation in the context of appreciation pressures. - Foreign direct investment (FDI) flows: - FDI flows to emerging markets have been less affected than other types of flows—especially compared with nonresident portfolio flows—mainly reflecting inflows to Asia. - In advanced economies, FDI flows declined in 2020, reflecting drops in intra-firm flows and corporate restructuring. - Other investment and reserves: - Several emerging market and developing economies sold foreign currency reserves during the sudden stop in early 2020 but rebuilt buffers later when capital flow pressures subsided. - Other investment net flows more recently declined, driven by Chinese banks increasing overseas deposits and lending operations. - Portfolio flows to emerging markets have rebounded since the spike in the VIX in March 2020. - International reserves declined in early 2020 but have generally rebounded since then. ### Fluctuations in current account balances and sectoral drivers - Current account deficits and surpluses exhibited wider fluctuations in 2020 than in recent years, driven by exceptional sectoral shocks with asymmetric effects across economies. - Role of travel shock: - Sharp decline in tourism arrivals led to significantly lower travel services and current account balances for Spain, Thailand, and Turkey and even larger declines for smaller tourism-dependent economies. - Counterpart declines included smaller rises in travel services balances across numerous net importers of travel services (for example, China, Germany, and Russia). - Role of oil trade shock: - Collapse in oil demand and energy prices early in the crisis was relatively short-lived; oil prices recovered in the second half of 2020. - Oil-exporting economies saw current account balances decline sharply (Russia and Saudi Arabia, among major economies, also due to production cuts), with corresponding increases in oil trade balances across many net oil-importing economies. - Role of trade in medical products: - The medical emergency triggered demand for medicine, medical supplies and equipment, and personal protective equipment, affecting imports and exports and intermediate inputs used in medical goods production. - Role of shift in household consumption composition: - Pandemic shifted household consumption from services toward consumer goods, especially in advanced economies, with increased preference for durables (cars and electrical appliances) to accommodate teleworking and virtual learning. - In emerging market and developing economies, the shift was less pronounced and mainly offset by increased consumption share of nondurables. - The shift is expected to be transitory, driven by the pandemic and lockdowns, involving some purchases that depreciate slowly (such as home office equipment). - Additional country-specific factors: - Some economies with large FDI liabilities experienced sharp increases in income balances and current accounts due to lower dividend payments to foreign investors (for example, Australia, Poland, and South Africa). - Increased global demand for gold led to sharp increases in gold imports (Switzerland) and exports for gold producers (South Africa). - Remittance flows declined sharply in early 2020, affecting emerging market and developing economies such as India and Mexico, but remittances have since recovered faster than anticipated and became an important consumption smoothing mechanism for recipient households. - Quantitative attribution: - About 66 percent of the movement of current account balances for major economies is explained by the sum of COVID-19–related factors (Figure 1.5; Annex 1.1 quantifies impacts). ### Unequal impacts across income groups and saving–investment balances - In 2020 poorer economies saw, on average, larger unexpected increases in their current account balances than did richer economies, compared with pre-pandemic forecasts, highlighting unequal impacts and potentially exacerbating divergent recovery speeds across income groups. - Relationship between income per capita and current account forecast errors: - A doubling in income per capita is associated with more than a 1 percentage point of GDP reduction in the current account balance compared with pre-pandemic forecasts (see Online Annex 1.2). - The slope coefficient in the regression ΔCA_i = α + β Sum of COVID-19 Factors_i + ε_i (30 economies with ESR assessments) is −1.05 (R-squared of 66 percent). Excluding China and the United States decreases the coefficient modestly (in absolute terms) to −0.99. - Fiscal expansion effects: - Unprecedented fiscal expansion is having significant effects on current account balances; what happens depends on a country’s relative fiscal policy stance compared with that of its trading partners (for economies with relatively limited fiscal expansions compared with trading partners, consequences include a rise in current account balances, such as in Mexico). - The fall in public saving–investment balances in richer economies has been partly offset by higher private saving–investment balances, which have increased in most economies but by more in richer ones. - Household and corporate saving: - The rise in private saving–investment balances mainly reflects record household saving rates in advanced economies due to lockdown-induced consumption reductions, saving of government transfers, and precautionary motives. - The increase in household saving and the fall in government saving have been much larger than during the global financial crisis. - Corporate saving movements have been relatively modest, reflecting offsetting effects of falling profits and government support to companies. ### Remittances and social protection - Remittances were resilient in 2020 and early 2021, with most sampled emerging market and developing economies experiencing a sustained increase since May 2020 that reversed the decline observed at the onset of the COVID-19 crisis. - Kpodar and others (2021) find remittances were greater in migrants’ home economies with higher COVID-19 infection rates, underlining the role of remittances as a private element of global social protection systems. _italics: ch1 - 2021. Overall services trade, which comprises about_ ### 1. Current Account Forecast Errors ### 1. Current Account Forecast Errors ### Income Levels and Forecast Errors (2020) - Current account forecast errors in 2020 are negatively associated with income levels, implying an “uphill” flow of capital from poorer to richer economies relative to previous forecasts. - This pattern reflects mainly larger negative forecast errors in public net lending in richer economies. ### Widening Global Current Account Balances (2020–21) - Global current account deficits and surpluses widened in 2020 compared with 2019 and are set to widen further in 2021. - Sectoral COVID-19 factors explain the entire widening in global current account balances in 2020. Net of these factors, the global current account balance in 2020 is slightly lower than in 2019. - The widening in 2020–21 is expected to be temporary and contrasts with the narrowing observed after the global financial crisis. - Contributing factors to the different dynamics in 2020–21 include: - Highly synchronized nature of the pandemic recession. - Relatively limited precrisis domestic and external imbalances and relatively few associated financial crises. - Ongoing fiscal expansions, which tend to raise current account deficits, are especially large for economies with current account deficits, such as the United States; this distribution of fiscal expansions contributes to further widening global balances in 2021. - Forecasts of global current account balances for the coming years have been revised up; the currently expected declining path over the medium term is subject to upside risks that would further add to the stock of external assets and liabilities. ### Selected Table and Aggregate Figures - Global Current Account Balance (Table 1.1, memorandum): - 2018: 2,590 (Billions of US Dollars) - 2019: 2,477 - 2020: 2,736 - 2021 Projection: 3,141 - Percent of world GDP: 2018: 3.0; 2019: 2.8; 2020: 3.2; 2021 Projection: 3.4 - Overall Surpluses (Billions of US Dollars): - 2018: 1,453 - 2019: 1,388 - 2020: 1,497 - 2021 Projection: 1,742 - Percent of world GDP: 2018: 1.7; 2019: 1.6; 2020: 1.8; 2021 Projection: 1.9 - Overall Deficits (Billions of US Dollars): - 2018: −1,136 - 2019: −1,049 - 2020: −1,135 - 2021 Projection: −1,394 - Percent of world GDP: 2018: −1.3; 2019: −1.2; 2020: −1.3; 2021 Projection: −1.5 ### Net International Investment Positions and Valuation Effects (2020) - Creditor and debtor stock positions remain historically high. - The largest debtor economy remains the United States: - Net international investment position declined from −51 percent of GDP in 2019 to −67 percent of GDP in 2020. - Other large debtor economies include Spain, the United Kingdom, and Australia. - Largest creditor economies include Japan, Germany, Hong Kong SAR, and China. - Valuation effects drove changes in NIIP for major economies: - The United States experienced the largest valuation losses in percent of GDP, mainly explained by asset price valuation losses from the increase in domestic stock prices affecting US external equity liabilities; currency-induced valuation effects for the United States are relatively small. - Turkey experienced large currency-induced valuation losses, particularly on debt, driven by the large depreciation of the Turkish lira; these were only partially offset by asset price valuation gains. - Brazil had currency-induced valuation losses on external debt positions, but these losses were offset by gains on equity positions and asset prices. - South Africa experienced large net foreign valuation gains (in terms of smaller net foreign liabilities) due to declining asset price valuations. - Table 1.2 (selected NIIP entries, Percent of GDP): - United States NIIP (Percent of GDP): 2017: −39.0; 2018: −46.9; 2019: −51.6; 2020: −67.3 - Germany NIIP (Percent of GDP): 2017: 59.0; 2018: 60.8; 2019: 71.4; 2020: 76.3 - Japan NIIP (Percent of GDP): 2017: 59.1; 2018: 60.2; 2019: 63.5; 2020: 66.3 - China NIIP (Percent of GDP): 2017: 16.8; 2018: 15.2; 2019: 16.0; 2020: 14.5 - Stocks of foreign assets and liabilities remain at historically high levels; in 2020 changes in NIIP were larger than explained by current account balances in a number of cases, reflecting large valuation changes, including those driven by asset price and currency movements. ### Normative Assessment of External Positions (2020) - IMF staff external sector assessments for 2020 analyze how the COVID-19 crisis affected external positions, using a multilateral approach matching positive and negative excess external imbalances. - The assessment combines numerical inputs from the External Balance Assessment (EBA) models with external indicators and analytically grounded judgment and country-specific insights. - The EBA methodology produces multilaterally consistent estimates for current account and real exchange rate norms (benchmarks) that depend on country fundamentals and desired policies. - IMF staff estimate current account and real effective exchange rate gaps by comparing actual current accounts (stripped of temporary components) and real effective exchange rates with IMF staff–assessed norms, using judgment and country-specific insights where appropriate. - IMF staff produce a holistic overall external sector assessment for 30 of the world’s largest economies based on estimated gaps and other external sector indicators (net international investment position, capital flows, foreign exchange reserves). ### COVID-19 Adjustments to Norms and Assessments - To strip out COVID-19–related factors and assess underlying current account positions, special adjustments to EBA model estimates are provided, estimating impacts on: 1. Travel services balance (mostly tourism) due to the drop in international travel 2. Oil balances 3. Trade in medical products triggered by the health emergency 4. Shifts in household consumption composition due to the shift from services toward durables and other consumer goods - Additional idiosyncratic adjustments include shifts in the income balance, gold balance, and remittances. - These COVID-19–related factors explain a large share of the movement in current account balances in 2020; without them, 2020 external sector assessments would be distorted and harder to interpret. - Annex Table 1.1.3 reports IMF staff adjustments reflecting COVID-19 factors and other country-specific factors. ### Current Account Norms and Policy Settings (2020) - Current account norms in 2020 reflected economic fundamentals and desirable policies. - IMF staff adjustments to norms include demographic corrections (Canada, Germany, Indonesia, South Africa) and enhancements for external debt sustainability (Argentina and Spain). - Norm changes in 2020 compared with 2019 mainly reflect changes in medium-term desirable fiscal policy settings—the level of the general government cyclically adjusted fiscal balance in five years recommended by IMF staff. - In most cases, IMF staff reduced the medium-term desirable fiscal policy settings compared with those for the 2020 ESR to avoid an excessively sharp adjustment over the subsequent five years; in some cases IMF staff increased the desirable medium-term fiscal policy setting to ensure stabilization or decline in government debt to GDP by 2026. - All normative medium-term fiscal policy settings (P*) for the fiscal balance in 2026 reported in Annex Table 1.1.5 are at or above the level of fiscal balances compatible with a constant government-debt-to-GDP ratio in 2026; additional analysis indicates these settings are consistent with either debt stabilization or, more often, debt reduction by 2026. ### Changes in External Assessments (2020) - Almost half of the 30 economy assessments changed categories in 2020 compared with 2019. *Source: IMF, 2021 External Sector Report, Chapter 1: "External Positions and Policies".* ### Annex Table 1.1.2, and Annex Table 1.1.3). Economies ### Annex Table 1.1.2, and Annex Table 1.1.3). Economies ### External Balance Assessment (EBA) and IMF staff assessments - EBA produces multilaterally consistent, cyclically adjusted current account norms that depend on country fundamentals and desirable policies. - EBA current account norm is multilaterally consistent and cyclically adjusted. - IMF staff combines EBA numerical inputs with country-specific judgment and COVID-19 adjustors to produce multilaterally consistent assessments for 29 largest systemically important economies and the euro area. - IMF staff–assessed real effective exchange rate (REER) gaps were generally consistent with IMF staff–assessed current account (CA) gaps. - Economies with estimated excess current account surpluses (deficits) generally also had an undervalued (overvalued) real effective exchange rate, according to IMF staff estimates. ### Classification of economies by external position vs. fundamentals (2020) - Moderately stronger, stronger, or substantially stronger than level consistent with medium-term fundamentals and desirable policies (9 economies): Germany, Malaysia, The Netherlands, Poland, Sweden, Thailand, Singapore, Mexico, Russia. Mexico and Russia entered this category in 2020, driven by increases in their current account gaps reflecting, in part, a smaller fiscal policy expansion compared with major trading partners. - Moderately weaker or weaker than level consistent with medium-term fundamentals and desirable policies (9 economies): Argentina, Belgium, Canada, France, Saudi Arabia, South Africa, the United Kingdom, the United States, Turkey. Turkey entered this category in 2020. - Broadly in line with level consistent with medium-term fundamentals and desirable policies (12 economies): Australia, China, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Spain, Brazil, the euro area, Switzerland. Switzerland entered this category in 2020. ### Evolution and persistence of external sector assessments - External sector assessments have generally persisted over time. In 2020, almost half of the 30 economy assessments changed categories compared with 2019. - Multilateral consistency: ESR economies had an excess current account deficit of 0.1 percent of world GDP in 2020, lower than the 2019 near-zero excess; counterpart was an aggregate excess current account surplus of 0.1 percent of world GDP for non-ESR EBA economies (Annex Table 1.1.3). - For Turkey, a larger-than-expected negative exchange rate gap—implying undervaluation, based on the IMF staff–assessed current account gap—reflects the sharp lira depreciation in 2020, which is expected to support current account adjustment over the coming years. - IMF staff–assessed current account gaps narrowed for several euro area economies (Belgium, Germany, The Netherlands) and for the euro area as a whole, and for other advanced economies (Switzerland, the United Kingdom). These changes largely mirrored increased current account gaps for emerging market and developing economies (Malaysia, Mexico, Poland). - IMF staff–assessed current account gaps—which incorporate IMF staff adjustments—changed substantially less in 2020 than did headline current account balances. ### Global imbalances and contributors (2020) - Global excessive imbalances (sum of absolute CA gaps vs. desirable medium-term levels) were broadly unchanged in 2020 at about 1.2 percent of world GDP. - Sum of absolute headline current account balances rose by 0.4 percentage point of world GDP to 3.2 percent of world GDP. - About 70 percent of excess balances in 2020 pertained to advanced economies, up from 69 percent in 2019. - Largest contributors to lower-than-warranted current account balances (as a share of world GDP): United States, France, the United Kingdom, Canada (in that order). - Largest contributors to larger-than-warranted current account balances: Germany, The Netherlands, Mexico, Poland, Russia. ### Medium-term current account forecasts and drivers - IMF staff forecasts underpinning the July 2021 WEO Update imply a gradual decline in global current account balances during 2022–26, reaching 2.5 percent of world GDP by 2026. - Main drivers: projected withdrawal of fiscal stimulus (rise in public saving) in the United States, euro area member countries, and other advanced economies; decline in private saving as pandemic-related saving dissipates; modest rise in global investment-to-GDP ratio driven by emerging market and developing economies, especially China. - Projected changes for major economies: - United States: current account deficit of 3.7 percent of GDP in 2021, up from 2.2 percent of GDP in 2019; deficit expected to start declining in 2023, falling below 3 percent of GDP in the medium term. - Euro area: current account surplus projected to increase by 0.6 percent of GDP to 2.8 percent of GDP in 2021 and remain near that level in the medium term. - Japan: current account surplus projected to widen by 0.3 percent of GDP to 3.6 percent of GDP in 2021, before stabilizing at just above 3 percent in the medium term. - China: current account surplus projected to decline by 0.2 percentage point of GDP to 1.6 percent of GDP in 2021, and converge toward about 0.5 percent of GDP over the medium term, with continued rebalancing toward consumption-driven growth. - Other EMDEs: current account balances projected to decline as domestic demand recovers in India, Indonesia, Mexico, Poland, South Africa under current policies. ### Key risks and uncertainties - Path and scarring impact of the pandemic: - Vaccine-resistant strains could slow recovery of economic activity, global trade, and commodity prices, and make sectoral effects (travel services, oil balances, medical goods, household consumption composition) more persistent. - Prolonged adverse effects on poorer economies could raise their current account balances toward surplus and weaken capital flows from richer countries. - Expedited vaccine rollout could improve investor and consumer sentiment, unwind crisis-induced changes in current account positions, and strengthen capital flows toward poorer countries. - Financial conditions: - Reassessment of market fundamentals, increases in sovereign yields, or higher expected policy interest rates in major advanced economies—including from a faster-than-expected pickup in inflation—could cause financing difficulties, capital outflows, and currency depreciation for emerging market economies. - Most emerging market and developing economies accumulated reserve buffers to withstand shocks; capital-flows-at-risk analysis suggests lower risks of portfolio outflows for economies with stronger fundamentals. - Fiscal policy path: - Additional deficit-financed fiscal expansions by current account deficit economies, or faster-than-expected fiscal consolidation among current account surplus economies, could prevent the projected narrowing in global balances. - Cross-border integration: - Near-term risk of export curbs on vaccines and vaccine ingredients. - Broader retreat from trade integration, increased protectionist measures, and trade and foreign direct investment restrictions could weaken recovery of global trade and growth in poorer economies integrated into supply chains. *Source: IMF staff calculations and assessments as presented in the 2021 External Sector Report (Chapter 1).* ### Box 1.5 considers alternative (out-of-baseline) ### ch1 - Box 1.5 considers alternative (out-of-baseline) ### Ending the Pandemic - Ending the pandemic is a precondition for ensuring a lasting recovery in global economic well-being and to avoid further divergence of economic recovery and capital flows between richer and poorer economies and long-term damage to trade, especially in services, and to pave the way for external rebalancing. - Key actions and supports: - Up-front financing and vaccine donations and investments to diversify and increase vaccine production to handle downside risks, including from the spread of new virus variants (Agarwal and Gopinath 2021). - Grants, national government resources, and concessional financing to pay for investments, ensure widespread testing and tracing, maintain adequate stocks of therapeutics, and enforce public health measures where vaccine coverage is low. - Fiscal policy should remain supportive until the recovery is firmly in place, conditional on available space, with programs targeted at the most affected sectors, aided by monetary accommodation, where possible. - Facilitate a synchronized global investment push, including ensuring financially constrained economies have adequate access to international liquidity—this could hasten the recovery and convergence to higher levels of per capita income, with limited effects on global current account balances (as Chapter 2 explains). - IMF proposal: a General Allocation of Special Drawing Rights (SDRs) equivalent to US$650 billion to ease constraints for financially constrained economies and help manage trade-offs between health, social spending, broader economic support, and external borrowing. - Implement clear health and safety protocols to promote a seamless return to contact-intensive sectors, including travel and tourism. - Ensure resilience of remittance flows by collecting timely and granular data and lowering costs through incentives (such as subsidies) to remittance service providers and supporting innovative technologies and market competition (World Bank 2021). ### Managing External Shocks and Capital Flows - Preparatory policy actions under favorable financing conditions: - Improve debt composition by extending maturities and locking in historically low interest rates. - Reverse departures from sound public debt management that may have occurred during the pandemic (for example, by reducing reliance on the domestic banking system). - If external shocks materialize (for example, an unexpected increase in global interest rates from a faster-than-expected pickup in inflation): - Economies with flexible exchange rates should allow adjustments where feasible. - Economies with adequate reserves (Annex Table 1.1.1) may use exchange rate intervention to alleviate disorderly market conditions and limit financial stress, particularly where foreign currency markets are shallow and balance sheet mismatches are large. - Foreign exchange intervention may be used to partially mitigate appreciation pressure that would otherwise push the economy toward deflation during periods of economic weakness, without precluding secular real appreciation. - Capital flow management measures: - Inflow measures can help manage surges in certain circumstances, together with macroprudential tools, when macroeconomic policy space is limited, financial stability is at risk, or policy adjustments take time to be effective. - Such measures should be transparent, temporary, targeted, and preferably avoid discrimination by residency; they should not substitute for warranted macroeconomic adjustments. - In imminent crisis circumstances, countries with limited reserves facing reversals of external financing could use outflow measures as part of a broad package, provided they do not substitute for warranted macroeconomic and structural policy actions; these measures would generally need to be broad-based and tightly enforced, transparent, temporary, and eliminated once crisis conditions abate. ### Resolving Trade Tensions - Recent developments and risks: - Countries imposed numerous new export and import restrictions in 2020–21, with a large share relating to medical products. - WTO (2020) reports the stock of new import restrictions in force has nearly tripled since 2016, now covering products representing nearly 10 percent of world imports. - More than half of current export curbs in the medical goods and medicine sectors are scheduled to remain in place through the end of 2021 (based on Global Trade Alert data). - US-China trade distortions, including tariffs introduced over the past four years, remain largely in place. - The adoption of currency-based countervailing duties is counterproductive and risks retaliation, further appreciation, and broader linking of trade and currency issues with adverse effects on multilateral systems and policy dialogue. - Policy recommendations: - Avoid export curbs on vaccines and vaccine ingredients; roll back restrictions to trade; and strengthen the rules-based multilateral trade system to sustain the recovery and strengthen cross-border supply chains for vaccines and medical goods. - Collaborate on phasing out tariff and nontariff barriers to trade, including medical equipment and supplies, to address the present pandemic and prepare for future health emergencies. - Modernize multilateral rules to address sources of conflict, including technology transfer policies and practices, farm and industrial subsidies, digital trade, international taxation, and measures to limit cross-border profit-shifting. - Restore an effective WTO dispute settlement system to facilitate resolution of long-standing global trade and investment distortions. ### Promoting External Rebalancing - Purpose: Reforms after exceptional near-term policy support can contribute to external rebalancing over the medium term in a manner conducive to sustained growth and to reduce the likelihood of trade tensions and disruptive adjustments. - Policy prescriptions vary by external position: - Economies with weaker-than-warranted external positions: - Fiscal consolidation once the pandemic is over is critical where excess current account deficits in 2020 partially reflected fiscal deficits above desirable medium-term levels (as in the United States). - Consolidation should be implemented to prevent long-term scarring, including protecting spending for infrastructure, health care, and education. - In some emerging market and developing economies with weaker-than-warranted positions (such as Argentina and South Africa), fiscal consolidation post-pandemic and a firm monetary policy stance to durably lower inflation and increase monetary policy credibility (Turkey) would help raise international reserves to more adequate levels. - Structural policies to increase productivity and, for commodity exporters (such as Saudi Arabia), diversification would further support rebalancing. - Address structural competitiveness challenges through labor, product market, and other reforms to promote green, digital, and inclusive growth. - Economies with stronger-than-warranted external positions: - Intensify reforms that encourage investment and discourage excessive private saving. - In economies with fiscal space (such as Germany and The Netherlands), avoid a rush to consolidate; support recovery with growth-oriented fiscal policy, including greater public sector investment in digitalization, infrastructure, and green transition to crowd in private investment and narrow excess current account surpluses. - Foster corporate investment and use active labor market policies to facilitate sectoral transitions and structural reforms to raise potential growth (examples: Poland, Mexico). - Discourage excessive precautionary saving by expanding social safety nets (Malaysia, Thailand) and tackle widespread informality (Thailand). - Economies with external positions broadly in line with fundamentals: - Continue addressing domestic imbalances to prevent excessive external imbalances. - Former excess surplus countries should gradually narrow larger-than-desirable fiscal deficits while boosting domestic private investment, including through state-owned enterprise reform, opening markets, and creating a more market-based and robust financial system (as in China). - Former excess deficit countries (including Spain) should carefully manage public debt, boost competitiveness, and facilitate post–COVID-19 sectoral adjustment through wage flexibility, labor market reforms, product and service market reforms, and measures to enhance education outcomes and innovation. - Analytical note: Policies for individual economies are detailed in the Individual Economy Assessments in Chapter 3 and summarized in Annex Table 1.1.6; comprehensive, multilaterally consistent analysis will remain necessary as more data become available to assess recovery. ### Box 1.1 — The Travel Shock (related evidence and statistics) - From March 2020 onward, government restrictions on cross-border travel and behavioral changes triggered a collapse in world travel activity. - Tourism revenues from overseas declined by about two-thirds on average compared with the previous year, and by close to 75 percent in the last three quarters of the year. - Among 31 economies with an average net travel trade surplus exceeding 5 percent of GDP between 2015 and 2019 (and with detailed 2020 balance of payments data available): - The median decline in the net travel balance as a share of GDP compared with its average over the previous five years was about 12 percentage points. - The median economy had a GDP of roughly US$8 billion and about 600,000 inhabitants in 2019. - Regional and country examples: - Eastern Caribbean Currency Union: aggregate surplus in travel services declined from US$3.1 billion in 2019 (40 percent of GDP) to US$1.1 billion in 2020 (17 percent of GDP). - Fiji: net tourism revenues fell by 90 percent in 2020 compared with 2019 (about 13 percentage points of GDP). - Effects and outlook: - Tourism-dependent economies experienced sharp GDP declines in 2020 relative to pre-pandemic forecasts, after controlling for domestic pandemic severity (Milesi-Ferretti 2021). - The decline in domestic demand and reduced tourist spending on imported goods partially offset the travel shock’s impact on current accounts via improvements in the goods trade balance and investment income balance. - Forecasts in the July 2021 World Economic Outlook Update envisage a still-substantial impact of the travel shock in 2021, particularly in emerging market and developing economies (such as Fiji, Seychelles, Thailand), with slow normalization of cross-border travel. - On average, current account balances of tourism-dependent economies are expected to revert to their pre-COVID trend by 2025. - Box authors: Gian Maria Milesi-Ferretti and Charlotte Sandoz. *Source: 2021 EXTERNAL SECTOR REPORT, CHAPTER 1.* ### 4. Income Balance5. Current Account Balance ### ch1 - 4. Income Balance5. Current Account Balance ### Predicted Level of Current Account Balances (Deviation from precrisis trend) - Figure 1.1.2 presents revisions of balances in the latest World Economic Outlook (WEO) compared with before the crisis (January 2020 WEO Update). - Panels and series shown (percent of GDP or percent): - 1. Real Exports (Percent) - 2. Real Imports (Percent) - 3. Services Balance (Percent of GDP) - 4. Goods Balance (Percent of GDP) - 5. Income Balance (Percent of GDP) - 6. Current Account Balance (Percent of GDP) - Grouping by travel export intensity: - High net travel exports: economies with average net travel exports above 5 percent of GDP between 2015 and 2019. - High net travel exports versus Low net travel exports shown separately. - Statistical presentation details: - Shading indicates mean and 90 percent confidence interval. - Outliers are excluded based on Cook’s distance. - Data sources and notes: - Sources: Eurostat; national authorities; Refinitiv Datastream; and IMF staff calculations. - Note: The figure shows the revision of balances in the latest World Economic Outlook (WEO) compared with before the crisis (January 2020 WEO Update). ### Box 1.2 — The Household Saving Surge: Causes, Decomposition, Distribution - Summary finding: - Household saving increased sharply during the COVID-19 crisis, mainly in advanced economies, driven by lower consumption and increased disposable income from government transfers. - The saving surge reflected both lockdown-induced (forced) saving and precautionary motives; effects differed markedly across countries and income groups. - Decomposition — income versus consumption: - Household disposable income changed due to two opposing forces: - Compensation of employees and other standard income sources fell (crisis and lockdowns). - Government support to income increased (higher social benefits or delayed payments of income taxes and social contributions, including via automatic stabilizers). - Consumption cuts played an important role across countries in early 2020. - Government transfer increases raised income by much more in the United States than elsewhere (Figure 1.2.1). - Figures and measurement details: - Figure 1.2.1 shows household saving and components as cumulated changes from 2019:Q1 (Percent of potential GDP). - Components displayed: - Other gross disposable income - Government support (transfers, taxes) - Consumption (–) - Household saving - Country panels: 1. United States; 2. Euro Area; 3. Other Advanced Economies; 4. China. - Sources: China, National Bureau of Statistics (household survey); Eurostat and national authorities (quarterly sector accounts); IMF, World Economic Outlook; and IMF staff calculations. - Note: Other advanced economies comprise Australia, Canada, the Czech Republic, Denmark, Norway, Slovenia, Sweden, and the United Kingdom. China’s chart is based on household survey (rescaled to the whole economy), and may be less comparable to other charts based on national accounts. - Lockdowns and forced saving: - The stringency of lockdowns was positively associated with household saving throughout the crisis, but the relationship seems to have weakened over time (Figure 1.2.2). - Interpretation consistent with “lockdown fatigue” (decreasing compliance, changing social patterns, working from home, greater use of e-commerce). - Figure 1.2.2: Change in household saving (Percent of potential GDP) versus Lockdown: stringency index; household saving shown as cumulative changes from its 2019 average. - Sources: Eurostat; IMF, World Economic Outlook; national authorities (quarterly sector accounts); Stringency and Policy Indices, Oxford COVID-19 Government Response Tracker; and IMF staff calculations. - Unemployment risk and precautionary saving: - Increase in saving partly explained by increased uncertainty about future labor market outcomes. - Household expectations about future unemployment (12-month horizon) spiked along with saving rates in the United States and the euro area (Figure 1.2.3). - Figure 1.2.3 panels: - 1. US Unemployment Expectations, 2018–21 (Percent) - 2. Euro Area Unemployment Expectations, 2018–21 (Percent) - Sources: IMF, International Financial Statistics; IMF, World Economic Outlook; national authorities (customs data); and IMF staff calculations. - Note: Unemployment expectations are constructed following Carroll, Slacalek, and Sommer (2019) using fitted values from the regression of the four-quarter-ahead change in unemployment rate on the survey answer about future unemployment. - Distribution of saving: - Studies based on credit card data suggest the increase in saving is likely concentrated at the top of the income distribution in nominal terms (Bachas and others 2020; Landais and others 2020). - US Federal Reserve data on change in household net wealth by percentile used as a proxy for distribution (includes valuation effects). - Between end-2019 and end-2020 there was an overall increase in net wealth as percent of disposable income, with much of the benefit accruing to people at the top of the distribution (large increase in corporate equities and mutual fund shares). - Little change in the distribution of wealth shares across groups; changes in net wealth were in line with pre-pandemic shares (Figure 1.2.4, panel 2). - Stimulus evidence: Chetty and others (2020) show January 2021 stimulus payments substantially increased spending among lower-income households but had little impact on spending among higher-income households, unlike April 2020 payments. - Figure 1.2.4 panels: - 1. US: Change in Net Household Wealth, 2019:Q4–20:Q4 (Percent of aggregate disposable income) - 2. US: Change in Net Household Wealth Shares, 2019:Q4–20:Q4 (Percentage points) - Asset categories noted: - Real estate - Corporate equities and sha... - Other assets (include pension entitlement, private businesses, consumer durables, and other assets) - Liabilities (–) - Net worth - Sources: Federal Reserve, Distributional Financial Accounts; IMF, International Financial Statistics; IMF, World Economic Outlook; national authorities (customs data); and IMF staff calculations. - Note: Other assets include pension entitlement, private businesses, consumer durables, and other assets. ### Box 1.3 — Recessions and Current Account Movements - Key global observation: - Unlike past severe economic downturns, the COVID-19 crisis has not reduced global balances (the absolute sum of current account deficits and surpluses). - Global balances narrowed by about 1.5 percent of world GDP after the 2007–08 global financial crisis and the 1973–74 oil shock, but widened by 0.4 percent of world GDP in 2020 (Figure 1.3.1). - Recessions and typical current account response: - Analysis of 278 recessions in 49 advanced and emerging market and developing economies during 1960 to 2019 suggests recessions typically raise an economy’s current account balance by about 1.5 percent of GDP in a persistent manner, driven by lower investment and imports. - Saving declines modestly, with government dissaving offsetting higher private saving (Figure 1.3.1, panels 2–4). - Sources: IMF, World Economic Outlook; and IMF staff calculations. - Note: The figure reports estimated responses and 90 percent confidence bands derived from Jordà (2005) local projections. Recessions are defined as negative real GDP growth years. - Heterogeneity by preexisting internal imbalances: - Recessions associated with domestic imbalances (credit booms, higher public debt) show sharper and more persistent current account adjustments than recessions without such imbalances (Figure 1.3.2). - These episodes feature larger declines in investment and greater private saving; similar results for recessions associated with financial crises. - During the COVID-19 crisis, limited financial sector turmoil and lower preceding private/public borrowing in deficit economies implied a relatively modest investment response compared with the global financial crisis. - Figure 1.3.2 panels: - 1. Current Account Response to Recessions (Percent of GDP) - 2. Investment Response to Recessions (Percent of GDP) - Note: Credit booms are based on Dell’Ariccia and others (2020). - Heterogeneity by preexisting external imbalances: - Economies with larger prerecession current account deficits typically experience sharper external adjustments than those with prerecession surpluses (Figure 1.3.3). - Mechanism: Surplus economies draw down buffers (significant dissaving) with smaller declines in investment; deficit economies exhibit larger adjustments. - Economies with higher external debt before the recession experience sharper and more persistent current account adjustments; similar for sudden stops in capital flows. - Figure 1.3.3 panels: - 1. Current Account Response to Recessions (by preexisting deficit/surplus) - 2. Saving Response to Recessions - Globally synchronized downturns, natural disasters, and epidemics: - During globally synchronized downturns (>25 percent of economies in recession), an economy’s current account balance increases significantly less than during less synchronized recessions because exports fall in tandem with imports (Figure 1.3.4, panel 1). - Large natural disasters or epidemics (supply-side shocks) tend to be associated with a decline in the current account balance, with import needs growing and exports declining (Figure 1.3.4, panel 2). - The COVID-19 crisis was one of the most globally synchronized recessions on record; economies entered 2020 with fewer internal and external imbalances and the crisis featured sharp sectoral effects (travel, oil, medical products, consumer goods). - These factors help explain the rise in global balances in 2020 instead of the sizable narrowing observed in past global downturns. - Figure 1.3.4 note: Less synchronized recessions correspond to episodes with <25 percent of countries in recession; more synchronized recessions correspond to >25 percent in recession. The sample period is 1870 to 2019; epidemics are those with high (90th percentile) impact. Responses are estimated using Cook’s distance correction. ### External Position Assessment: Current Account Gaps and REER Gaps - Conceptual framing: - Current account deficits and surpluses can be desirable for individual countries and globally, facilitating smoothing of country-specific shocks and efficient global capital allocation. - The IMF staff assesses whether current account balances are “excessive” by comparing actual current account (stripped of cyclical and temporary factors) to the level consistent with fundamentals and desirable policies, producing an IMF staff–assessed gap. - A current account balance higher (lower) than implied by fundamentals and desirable policies corresponds to a positive (negative) current account gap. - Interpretation and policy relevance: - Elimination of such a gap is desirable over the medium term, though temporary gaps and gradual adjustment may be warranted. - Gaps can reflect domestic macroeconomic or structural policy distortions or foreign distortions. - Real effective exchange rate (REER) consistency: - Assessments include a view of the REER consistent with the assessed current account gap. - A positive (negative) REER gap implies an overvalued (undervalued) exchange rate. - REER gaps do not necessarily predict future exchange rates and may occur in any economy, including those with floating exchange rates. - Broader assessment metrics: - The overall external position assessment also considers: - Financial account balances - International investment position - Reserve adequacy - Other competitiveness measures (for example, unit-labor-cost-based REER) - The external position is judged weaker (stronger) than warranted by fundamentals and desired policies depending on how low (high) the current account balance is relative to the IMF staff–assessed norm and how overvalued (undervalued) the REER is deemed to be. - Broad alignment: external position broadly in line with fundamentals and desired policies when the current account balance and the REER are at, or close to, their IMF staff–assessed norms. - Assessments strive to be multilaterally consistent; negative IMF staff–assessed current account and REER gaps in some economies are matched by positive IMF staff–assessed gaps in others. *Source: ch1 - 4. Income Balance5. Current Account Balance (PDF chapter).* ### Box 1.4. External Assessments: Objectives and Concepts ### Box 1.4. External Assessments: Objectives and Concepts ### Context and methodology - IMF’s G20 Model is used to illustrate the impact on trade and current account balances of two risk scenarios: (1) a new wave of COVID-19 in emerging market economies; and (2) faster vaccine distribution, particularly in emerging market economies. - Results are presented in Figure 1.5.1 as deviations from the July 2021 WEO Update projections (the baseline) for advanced economies and emerging market economies. - Note: Size of bubbles based on GDP in US dollars. AEs = advanced economies; EMs = emerging market economies. - Authors of this box are Susanna Mursula and Daniel Leigh. ### Downside scenario — A new COVID-19 wave in emerging markets with additional financial tightening and scarring - Timing and transmission: - Assumes new, more infectious variants generate an additional upsurge in infections in emerging market economies in late 2021. - Vaccine supplies in many emerging markets increase only gradually, leading to mandated and voluntary mobility restrictions that slow growth in late 2021 and cause a more notable slowdown in 2022. - Monetary and financial dynamics: - Advanced economies experience mild negative spillovers from slower emerging market growth, but inflation pressures prove more persistent than expected, and monetary policy normalization occurs faster than assumed in the baseline. - Faster monetary policy normalization plus investor concern about emerging market prospects leads to a notable and persistent tightening in financial conditions in many emerging markets. - Real economy and external sector effects for emerging markets: - Weaker growth and tighter financial conditions lead to more bankruptcies and additional persistent scarring on the supply side. - Negative supply-side impact, demand disruptions, and tighter global financial conditions cause currency depreciation and a sharp contraction in imports peaking at –8 percent in 2022. - Export capacity also contracts, but by less than imports (given relatively resilient demand from advanced economies), resulting in an increase in the current account balance for emerging markets. - Effects for advanced economies: - Negative spillovers from emerging markets depress advanced-economy exports; with relatively resilient overall demand, advanced-economy current account balances decline. - Broader implications: - The downside scenario exacerbates the increasingly unequal impact of the crisis, with a more divergent recovery and a further slowdown in capital flows from richer to poorer economies. - With a fall in current account balances occurring in both deficit and surplus advanced economies, there is little external rebalancing or widening in overall global current account balances. ### Upside scenario — Faster vaccine distribution, particularly in emerging markets - Timing and transmission: - More concerted efforts to expand vaccine supply in emerging market economies lead to faster normalization of mobility in late 2021 and into 2022, allowing faster reopening of high-contact sectors. - Growth and supply effects: - Growth rebounds above baseline mildly in 2021 and more notably in 2022. - Faster recovery in emerging market economies helps unwind some of the scarring in the baseline in 2023 and beyond. - Advanced economies experience positive trade spillovers from the faster recovery. - Trade and external sector effects: - For emerging markets, faster recovery in domestic demand, easing of mobility restrictions, and resulting increases in domestic interest rates and associated currency appreciation raise import demand by about 3 percent by 2022. - Faster recovery in supply in emerging markets, and the rise in global economic activity, raises exports in both emerging market and advanced economies by about 2 percent. - Broader implications: - The faster recovery is associated with a decline in emerging market current account balances and a strengthening of capital flows from richer to poorer economies. - Given the lack of correlation of emerging market economy status with current account surpluses or deficits, there is little impact on global current account balances. *Source: ch1 - Box 1.4. External Assessments: Objectives and Concepts (IMF 2021).* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### 2020 Individual Economy Assessments: Summary of Policy Recommendations - Argentina — Overall 2020 Assessment: Weaker - Implement growth-friendly fiscal consolidation and prudent monetary policies to maintain strong trade surplus, rebuild international reserves, and regain market access; introduce reforms to strengthen competitiveness and export capacity. - Australia — Overall 2020 Assessment: Broadly in line - Maintain adequate monetary and fiscal policy support, including scaling up public investment, to promote domestic demand and keep the external position in line with fundamentals. - Belgium — Overall 2020 Assessment: Moderately weaker - Strengthen competitiveness by addressing structural challenges, including labor and product market reforms, to foster green, digital, and inclusive growth. Rebuild fiscal space. - Brazil — Overall 2020 Assessment: Broadly in line - Implement fiscal consolidation accompanied by measures to support public and private investment and structural reforms to reduce cost of doing business and strengthen competitiveness. Stand ready for prudent FX interventions to alleviate possible disorderly market conditions. - Canada — Overall 2020 Assessment: Moderately weaker - Develop credible medium-term fiscal consolidation plan; boost nonenergy exports through improved labor productivity, investment in R&D and public infrastructure. - China — Overall 2020 Assessment: Broadly in line - Accelerate structural reforms (by further opening domestic markets, reforming SOEs, and ensuring competitive neutrality with private firms), reduce high household savings (by strengthening the social safety net), and promote green investment to accelerate the transition to more balanced, inclusive, and green growth. Further increase exchange rate flexibility to facilitate the adjustment to economic shocks. - Euro Area — Overall 2020 Assessment: Broadly in line - Implement area-wide initiatives (banking and capital markets union and fiscal capacity for macro-stabilization) to further reinvigorate investment and reduce the aggregate CA surplus; see member country-specific recommendations to reduce internal and external imbalances. - France — Overall 2020 Assessment: Weaker - Improve competitiveness by reinvigorating structural reforms and rebuilding fiscal space over the medium term. - Germany — Overall 2020 Assessment: Stronger - Pursue growth-oriented fiscal policy with greater public sector investment in digitalization, infrastructure, and climate mitigation; implement structural reforms to foster entrepreneurship that would also stimulate investment; introduce additional tax relief for lower-income households; adopt pension reforms prolonging working lives. - Hong Kong SAR — Overall 2020 Assessment: Broadly in line - Ensure fiscal sustainability given rapidly aging population and maintain policies that support wage and price flexibility to preserve competitiveness. - India — Overall 2020 Assessment: Broadly in line - Implement fiscal consolidation in the medium term and step up efforts to improve the business climate, ease domestic supply bottlenecks, and liberalize trade and investment to attract FDI and improve the CA financing mix. Continue ER flexibility as the main shock absorber, with interventions limited to addressing disorderly market conditions. - Indonesia — Overall 2020 Assessment: Broadly in line - Pursue planned fiscal consolidation while boosting competitiveness and allowing for higher infrastructure and social spending to foster human capital development; facilitate sectoral adjustment; ease non-tarriff trade barriers and FDI restrictions; improve labor market flexibility. Continue ER flexibility with FX interventions limited to disorderly market conditions. - Italy — Overall 2020 Assessment: Broadly in line - Raise productivity and improve the business climate through higher investment and structural reforms, including by upskilling the workforce and increasing the quality of infrastructure and the effectiveness of the public administration. Improve budget efficiency to lower vulnerabilities associated with the rollover of external debt. - Japan — Overall 2020 Assessment: Broadly in line - Implement gradual fiscal consolidation within a well-specified medium-term fiscal framework, accommodative monetary policy, and structural reforms to mobilize investment, reduce debt, and support reflation and growth. Focus on reforms to increase labor supply, boost productivity and wages, reduce barriers to entry, and accelerate agricultural and professional services sector deregulation. - Korea — Overall 2020 Assessment: Broadly in line - Continue accommodative fiscal and monetary policies. Implement structural policies to stimulate investment and facilitate rebalancing of the economy toward services and other new growth drivers, by reducing barriers to entry and deregulating the nonmanufacturing sector; strengthen the social safety net. ER should remain market determined, with intervention limited to preventing disorderly market conditions. (continued) - Malaysia — Overall 2020 Assessment: Substantially stronger - Strengthen the social safety net, encourage private investment, and boost productivity growth. - Mexico — Overall 2020 Assessment: Stronger - Implement structural reforms to deliver stronger investment and strong, durable, and inclusive growth. Implement credible medium-term tax reform. Continue using floating ER as the main shock absorber, with FX interventions used only to prevent disorderly market conditions. - The Netherlands — Overall 2020 Assessment: Stronger - Promote the recovery and support investment in physical and human capital to foster robust potential growth. - Poland — Overall 2020 Assessment: Substantially stronger - Boost public investment by deploying Next Generation EU funds to help tackle infrastructure gaps, digitalization, and climate change; use public policies to help foster corporate investment and productivity; implement active labor market policies to facilitate sectoral transition and structural reforms to raise potential growth. - Russia — Overall 2020 Assessment: Moderately stronger - Pursue structural reforms to improve the business climate and address inefficiencies in the state-owned enterprise sector; promote investment in infrastructure, health, and education, to lift potential growth and diversify the economy away from oil and gas exports. - Saudi Arabia — Overall 2020 Assessment: Moderately weaker - Implement further consolidation, including energy price reforms and restraint of current spending, as well as structural reforms to diversify the economy and boost the non-oil tradable sector. - Singapore — Overall 2020 Assessment: Substantially stronger - Increase public investment, including on health care, physical infrastructure, and human capital, to address structural transformations in light of a rapidly aging population, transition to digital economy, and climate change; introduce structural reforms to improve productivity. - South Africa — Overall 2020 Assessment: Moderately weaker - Implement structural reforms to ameliorate competitiveness and pursue gradual but substantial fiscal consolidation, once the pandemic is over, while providing space for infrastructure and social spending; focus on improving governance, efficiency of key product markets (by crowding in the private sector), and functioning of labor markets; seize opportunities to build up reserves. - Spain — Overall 2020 Assessment: Broadly in line - Support investment, including through leveraging Next Generation EU funds, and foster competitiveness to raise potential growth and support decarbonization and digitalization while carefully managing the public debt load. Achieve productivity gains through continued wage flexibility and reforms to address labor market duality, product and service market reforms, and actions to enhance education and innovation. - Sweden — Overall 2020 Assessment: Stronger - Support greener and growth-enhancing private and public investments to facilitate structural transformation and support domestic demand; implement structural reforms to boost potential output. - Switzerland — Overall 2020 Assessment: Broadly in line - Ensure balanced domestic and external contributions to growth and improve the public-private mix in financial outflows, easing pressures on the franc; continue supportive fiscal policy and enhance efforts to foster green, digital transformation and productivity gains to address competitveness and aging. - Thailand — Overall 2020 Assessment: Stronger - Embark on fiscal expansion to revitalize domestic demand, through targeted social transfers as well as infrastructure investment; continue reforming social safety nets and addressing widespread informality to reduce precautionary saving and support consumption. Ensure ER flexibility as the key shock absorber, with intervention limited to disorderly market conditions. - Turkey — Overall 2020 Assessment: Moderately weaker - Further reining in of credit growth and strong commitment to and delivery of a firm monetary policy stance; enhance the fiscal anchor with a credible commitment to future consolidation; and take additional steps to build policy credibility to encourage capital inflows, support de-dollarization, and buildup of reserves. - United Kingdom — Overall 2020 Assessment: Weaker - Implement structural reforms to boost productivity and international competitiveness, including supporting reallocation to fast-growing sectors by upgrading the skill base and ensuring appropriate access to finance, as well as encouraging firm digitalization and innovation. - United States — Overall 2020 Assessment: Moderately weaker - Use fiscal space to increase infrastructure investment and facilitate the transition to a lower-carbon economy in the near term and embark on fiscal consolidation in the medium term, to put the debt-GDP ratio on a downward path; implement structural policies to increase competitiveness, including enhancing schooling, training, and mobility of workers, and labor force participation. Roll back tariff barriers, and resolve trade and investment disagreements supporting a global trading system. *Source: 2020 Individual External Balance Assessments. Note: CA = current account; ER = exchange rate; FDI = foreign direct investment; FX = foreign exchange; R&D = research and development; SOE = state-owned enterprise.* --- _Source: https://www.imf.org/-/media/files/publications/esr/2021/english/ch1.pdf_