## CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ## Source details **Canonical URL:** [CHAPTER 1 EXTERNAL POSITIONS AND POLICIES](https://www.imf.org/-/media/files/publications/esr/2026/english/ch1.pdf) ## Other formats - [Markdown version](/-/media/files/publications/esr/2026/english/ch1.pdf.md) - [Structured JSON version](/-/media/files/publications/esr/2026/english/ch1.pdf.json) --- ### Global saving and investment dynamics - Global imbalances have widened amid a decline in saving and only modest changes in investment. - Current pattern resembles adjustment during major real estate corrections (Japan in the 1990s; Spain and the United States after the global financial crisis), with Japan’s case noted as particularly illustrative. - Household saving has ticked up amid weak consumer confidence about future income and employment prospects, partly offset by lower public saving. - Persistently low returns on capital are consistent with the observed investment decline (IMF 2026a); policy measures aimed at reducing excess capacity and curbing “involution” may also have contributed (IMF 2026b). ### United States: drivers of the current account - Public sector imbalance is the main driver of the US current account. - Deficit widened in 2024 driven mostly by a sharp decline in public saving, then narrowed somewhat in 2025. - 2025 narrowing reflected higher public saving and lower aggregate investment, which more than offset the decline in household saving and an increase in technology-related investment. - Increased tariff revenues contributed to the improvement in public saving. - Household saving remained low and declined further, partly driven by wealth effects from a buoyant stock market. - Since 2022, public saving has averaged around −0.8 percent of world GDP, compared with 0 percent over 2000–06. - Tech investment definition used in decomposition analyses: sum of nonresidential private investment in information processing equipment and software. ### Euro area: savings, investment, and current account - Euro area current account surplus reflects continued weak investment. - Investment declined in 2024 amid weak consumer and business confidence, then rebounded in 2025 supported by easing monetary conditions, higher public spending, and inventory accumulation. - Current account decline in 2025 was particularly pronounced in Germany, France, and Ireland; Ireland’s balances are noted as particularly volatile due to distortions from large multinational enterprises. - Large current account reflects high private saving (above pre-pandemic averages) and persistently weak investment dynamics driven by subdued productivity growth, demographic headwinds, and structural barriers in some member states. ### Trade barriers, reconfiguration of trade, and policy uncertainty - Widening of global balances occurred amid elevated trade tensions, including a sharp increase in US tariffs, and heightened policy uncertainty — a contrast with the early 2000s. - Empirical evidence over four decades suggests no clear relationship between past trade barriers and aggregate current account balances (Box 1.1; IMF 2026d). - Since late 2024, significant rise in policy uncertainty and trade barriers (Figures 1.10 and 1.11). - Pronounced reconfiguration of trade patterns: - Expansion of China’s trade surplus matched by declines in the euro area, Japan, and many other surplus economies. - US trade balance broadly unchanged overall; imports surged in anticipation of the April 2 tariff announcement (mostly durables) and moderated thereafter, leaving overall imports as a share of GDP broadly unchanged versus 2024. - Differential tariff rates led to a decline in US imports from China offset by increases from the rest of the world. - Shifts in trading partners partly driven by the tech-related investment boom; the United States increased imports from Taiwan Province of China, Korea, and Japan. - US tariff changes measured as change in trade-weighted average tariffs between January 1 and November 14, 2025 used in cross-country correlation analyses. ### Interest rates, financial conditions, and capital flows - Global real interest rates have risen steadily since 2023 as demand for funds from deficit countries outweighs supply from surplus ones. - Saving from surplus countries, notably China, has fallen short of global demand for funds; the United States has been a major driver of demand because of large fiscal deficits and strong technology-related investment. - Episode of widened global balances occurred alongside rising real interest rates — a key contrast with the early 2000s. - Despite higher global interest rates, global financial conditions eased in 2025, partly reflecting stronger US equity markets; easing relaxed leverage constraints on global financial intermediaries and enabled greater intermediation of cross-border funding toward higher-return projects. - Easing financial conditions imply widening global current account balances as deficit economies with high-return opportunities receive higher capital inflows. ### Exchange rates, currency movements, and drivers - US dollar: strong appreciation in real effective terms in Q4 2024 followed by sharp depreciation around Q2 2025. - Much of US dollar depreciation between January and the April tariff announcement explained by fundamentals (including positive interest rate differentials and upside US growth surprises). - Depreciation following the April tariff announcement points to some disconnect from fundamentals, potentially reflecting shifts in risk sentiment tied to higher policy uncertainty and concerns about the US fiscal trajectory, alongside easing global financial conditions. - US dollar remains close to the 2023–25 average and well above its 2000–25 average (US REER, 2000–25 average = 100; increase = appreciation). - Other major currencies in 2025: - Euro appreciated in nominal effective terms over the first half of the year and remained flat thereafter. - Pound sterling strengthened. - Renminbi depreciated in the first half of the year before appreciating toward year-end following the May trade agreement; overall broadly stable vis-à-vis the US dollar, implying a real effective depreciation given inflation differentials. - Japanese yen depreciated in 2025 despite appreciating in the first half of the year; much of the yen movement since mid-2025 remains unexplained by fundamentals and co-moves with positions in the yen futures market. Market perceptions of fiscal risk influenced the term premium priced into Japanese yields. - RMB de jure exchange rate arrangement: “managed floating” with a view to keeping the RMB exchange rate stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies; floating band of the RMB’s trading prices is 2 percent against the US dollar in the interbank foreign exchange market (IMF 2026b). ### Exchange Rate Pressures and Monetary Policy (2025) - Both advanced and emerging market economies faced uniform appreciation pressure in the first half of 2025. - Exchange rate changes were the main outlet for addressing pressures; adjusted changes in FX reserves also contributed (examples: Poland, Thailand for appreciation; Korea, China for depreciation). - Second half of 2025: - Exchange market pressure two-sided in advanced economies. - Tendency toward appreciation continued in many emerging markets, supported by easing global financial conditions and strong capital flows. - India faced depreciation pressure in the second half of 2025, in part reflecting further tariffs imposed by the United States. - Contribution from monetary policy remained subdued throughout 2025 despite policy rate adjustments across many ESR sample economies. ### Global financial flows, balance sheets, and valuation effects - Gross capital flows increased in 2025 in both emerging and advanced economies as global financial conditions eased. - Net and gross capital flow patterns in 2025: - Total net capital flows to emerging markets increased; China remained an outlier with continued negative net capital flows. - Gross inflows to China remained close to zero in 2025, reflecting continued weak inward FDI; China’s gross outflows recovered. - Other emerging markets: gross inflows picked up with portfolio and other investment flows increasing; gross FDI inflows remained below pre-COVID-19 average. - United States in 2025: - Gross capital inflows remained robust with compositional shift toward equity. - Portfolio inflows were main driver; equity accounted for the bulk of the increase—consistent with the AI-related investment boom. - Net inflows into US treasuries eased, particularly at longer maturities. - Other advanced economies saw strong pickup in both gross inflows and outflows in 2025. - Net external creditor and debtor positions narrowed slightly in 2025 after widening in 2024. - United States NIIP-to-GDP ratio narrowed slightly in 2025 as positive FX valuation effects and nominal GDP growth more than offset net financial outflows and price valuation losses. - United States switched from a net long equity position to a net short one due to strong net capital inflows in equities and persistent asset price outperformance since COVID-19. - Net investment income balance for the United States deteriorated to close to zero. - EMDEs: increased share of domestic-currency liabilities and growing exposures to US assets imply a US dollar depreciation now tends to have negative effects on their NIIP positions; holdings in US equity have become very large. ### Developments in early 2026 - High-frequency indicators point to continuation of elevated global current account balances: - China recorded another large increase in its trade balance in the first two months of 2026, supported by strong electronics exports. - Korea recorded historical high trade surpluses. - Trade balances in both the United States and the euro area declined in early 2026. - Early 2026 trade data indicate a larger statistical discrepancy as the sum of global surplus exceeds the sum of global deficits. - High-frequency capital flow data signal continued strong gross portfolio inflow to EMs (excluding China) and a potential recovery of inflows to China. - US tariff developments and trade policy timing: - Supreme Court ruling in February 2026 invalidated all tariffs imposed under the authority of the International Emergency Economic Powers Act. - US administration implemented a 10 percent import surcharge (with certain specific exemptions) under section 122 of the Trade Act of 1974 which may remain in force for up to 150 days. - Taking into account recent changes under section 122, the average applied effective tariff rate on imports into the United States remains at around 7 to 8.5 percent. - US Administration announced an intent to return to the pre-February status quo. - Middle East war impacts and financial market reaction: - War created headwinds for a reduction of global current account balances; impact depends on oil price developments and potential second-round effects. - Historically, higher oil prices accompany current account improvements for energy exporters and deteriorations for energy importers. - Energy exporters whose production is directly affected by the war could see narrowing of current account surplus if energy revenues fall and governments provide support. - The United States, as a modest oil exporter, may see its current account deficit narrow given a positive terms of trade shock. - War led to a moderate tightening of global financial conditions and the dollar appreciated somewhat following the outbreak. - Gross portfolio inflows to EMs dropped in March 2026 with the onset of the war; decline broad-based and particularly large in emerging and developing Asia, driven mainly by a reduction in gross portfolio equity inflows. ### Assessment methodology (EBA refinements) and 2025 external positions assessment - Coverage: Multilaterally consistent individual assessments for 30 largest economies representing about 90 percent of world GDP. - Assessments based on 2026 EBA methodology refinements. - Key methodological refinements in 2026 EBA: - Update and extension of the data. - Improvement in calculation of commodity terms of trade gaps. - Revision of the demographic bloc. - Refinements examine role of trade barriers in current account determination. - Introduction of an excess-adjusted Net Foreign Assets (NFA) with implementation planned for the 2027 External Sector Report. - Revisions affected classification of inflation bias adjustors; number of adjustors in 2025 decreased compared to 2024 in part due to demographic improvements and reclassification. - Assessment approach: - Current account gaps derived by comparing EBA norms with realized current account after adjusting for cyclical and other temporary factors. - Current account gaps translated into real exchange rate gaps using estimated semi-elasticities. - Real exchange rate models inform assessments but more weight placed on current account models given REER volatility. - IMF staff judgment and country-specific adjustors applied; residuals and measurement issues can be large. - 2025 assessment results (relative to levels implied by medium-term fundamentals and desirable policies): - Moderately stronger, stronger, or substantially stronger: China, Germany, India, Japan, Korea, Malaysia, the Netherlands, Singapore, Spain, Sweden, and Thailand. - Moderately weaker, weaker, or substantially weaker: Argentina, Australia, Belgium, Brazil, Canada, Italy, Russia, Saudi Arabia, Türkiye, the United Kingdom, and the United States. - Broadly in line: Euro Area, France, Hong Kong SAR, Indonesia, Mexico, Poland, South Africa, and Switzerland. - Drivers of current account gaps in 2025: - Residuals account for a large share of current account gaps in many cases. - Policy gaps remain relevant in some countries (examples: negative credit gap in the Netherlands; weaker social safety nets in Malaysia; larger fiscal deficit in the United States). ### Policy gaps, residuals, and spillovers - Policy gap contributions reflect both domestic deviations from desirable policies and the average of deviations across all economies. - Unilateral versus multilateral effects: - If the United States closes its fiscal gap, its CA gap would narrow by about 1 percentage point. - If all economies close their fiscal gaps simultaneously, the reduction in the US CA gap would be about 0.5 percentage points. - Residuals capture country-specific considerations not captured by the EBA model and can be positive or negative: - Positive residual examples: China — elevated precautionary saving linked to social safety net weaknesses and prolonged housing downturn; Germany — regulatory constraints impeding investment and measurement issues related to retained earnings. - Negative residual examples: United States — reserve currency status, deep financial markets, and frontier technological innovation attracting capital inflows; Türkiye — persistently elevated inflation and inflation expectations raising private saving, combined with a positive wealth effect from higher gold prices. - Cross-country spillovers: - EBA variables defined relative to a GDP-weighted sample average; policy changes in large economies induce material cross-border spillovers. - If the United States were to close its fiscal gap, the global average fiscal balance would rise, shifting other countries’ fiscal policy gap contributions down by about 0.4 percentage points of GDP. - Residuals can reflect cross-country spillovers from country-specific structural distortions. - Measurement and analysis notes: - Difficulties in measurement, coverage, and assessment of normative stance preclude direct inclusion of some considerations (for example, pension systems, labor or product market regulation) in the EBA CA model; complementary toolboxes and Online Annexes analyze residuals for a subset of countries. ### Current account norms in 2025 and norm compression - Largest contributors to CA norms remain NFA, output per worker, demographics, and desirable policies (fiscal policy, public health spending as proxy, desirable credit gap, and FX intervention interacted with capital controls). - 2026 EBA refinements resulted in norm compression: - Economies with initially positive CA norms generally saw norms decline; economies with initially negative norms experienced increases. - Three key factors contributing to compression: - Changing demographic trends leading to convergence and rapid demographic transition in emerging markets. - Estimated relationship between current account and NFA modestly weakened due to growing importance of valuation effects in NFA dynamics. - Desirable health policies contribute to compression by capturing precautionary saving motives. - Output per worker contributes to widening of norms, reflecting stronger capital outflows from advanced economies to faster-growing economies. - Country-specific drivers: - Korea and Japan: declines in demographic contributions are main drivers of norm changes. - United States: increases in the norm reflect contributions from demographics, NFA, and output per worker. - China: norm decreased in part due to a lower contribution from output per worker. ### Global excess current account balances - Global excess CA balances for ESR economies rose by a further 0.7 percent of ESR GDP in 2025, marking the largest increase in the past decade. - Drivers of the widening in 2025: - Predominantly driven by data revision and extension, reflecting changing relationships between the current account and macroeconomic fundamentals. - Changes in headline current accounts (EBA gaps based on the 2022 model) and revisions to the model specification also played a role. - Increase in excess balances broad-based but driven predominantly by China and the United States: - China: widening reflects a rise in the headline current account balance. - United States: widening driven by the data update and extension. - For ESR economies, staff-assessed excess CA balances account for about 2/3 of the overall global CA balances. - Changes in CA gaps between 2024 and 2025 driven primarily by changes in the actual current account, accounting for about 60 percent of the variation. ### Outlook and risks (April 2026 WEO reference forecast) - Global current account balances projected to narrow over the medium term. - Among surplus countries, especially China, Japan, Korea, and the euro area are projected to reduce current account surpluses; oil exporters projected to see shrinking surpluses over the medium term, with a short-lived uptick in 2026 due to a recent energy price spike. - Major deficit economies such as the United States and the United Kingdom projected to reduce their deficits. - Some emerging markets (for example, India and Indonesia) projected to have widening current account deficits, partly offsetting global narrowing. - Contributing factors to projected narrowing: - Projected medium-term fiscal consolidation in current account deficit economies and fiscal expansion in current account surplus economies expected to contribute about 0.2 percentage points of projected narrowing of global balances. - Waning cyclical factors expected to contribute about 0.05 percentage points to the decline in the global balance. - Projected fiscal adjustment accounts for about 10 percent of the EBA-estimated excess global balances. - Risks of large and persistent global imbalances: - Can indicate uneven growth drivers and a macro environment that may give rise to macro, financial, or fiscal stability risks warranting policy adjustments. ### Risks from excess current account balances - Excess CA surpluses can signal inefficient resource allocation and contribute to systemic macrofinancial risks by depressing real interest rates, tilting investors toward riskier assets, and increasing leverage. - Large and persistent excess CA deficits are particularly concerning when they risk unwinding disorderly, often associated with abrupt capital flow reversals, sharp asset price corrections, and deep economic downturns. - Excess CA balances can heighten the risk of sudden stops or capital flow reversals, especially in economies with negative NIIP. - Increased CA surplus in large countries can alter policy tradeoffs for trading partners and lead to negative spillovers when trade partners’ monetary policy is constrained (for instance, by the effective lower bound). - Rapid increases in CA surpluses can have disproportionate negative effects on specific bilateral trade partners or sectors; sectoral imbalances in key industries (e.g., semiconductors, electronics) can fuel concerns of unfair competition and provoke defensive responses. ### Scenario: Continuation of current trends (scenario assumptions and outcomes) - Model context: World Economic Outlook forecasts have tended to exhibit a downward bias for global current account balances. - Key scenario assumptions: - United States: intensification of the tech- and AI-driven boom; renewed fiscal expansion on top of robust consumer spending and large fiscal deficits. General government deficit expected to remain in the 7- 7½ percent of GDP range over the medium term in the 2026 United States IMF Staff Report. - China: weaker domestic demand with weaker consumption, protracted property sector downturn, diminishing returns to investment, and limited currency adjustment. - Euro area: persistently weak productivity growth and subdued investment. - Simulated medium-term outcomes (average of three- to five-year horizon): - Global current account balances widen further by about 0.4 percent of world GDP over the medium term, with contributions from China, the euro area, and the United States. - Global real interest rates decline marginally. - Global output rises temporarily but is accompanied by a buildup of inefficiencies and risks. - Country mechanics: - United States: renewed fiscal expansion reduces saving, raises investment via AI-boom, leads to REER depreciation that offsets some pressures; current account deficit widens; output increases. International spillovers positive for Emerging Asia. - China: worsening domestic demand increases private saving; current account surplus widens; limited nominal exchange rate adjustment leads to REER depreciation as deflationary pressure increases; output held up by strong net exports. - Euro area: households increase saving; real investment falls; current account increases; spillovers mainly via higher saving raising global investment and lowering saving elsewhere. ### Benefits of collective actions and simultaneous adjustment scenario - Well-calibrated, simultaneous policies across economies support gradual and orderly rebalancing, limit adverse spillovers, and support global growth. - Simultaneous Adjustment scenario assumptions: - United States: expenditure-driven fiscal consolidation while AI-driven boom continues. - China: increase social spending, support residential sector transition, roll back industrial policy, increase business dynamism; renminbi adjusts flexibly. - Euro area: higher public investment via full utilization of Recovery and Resilience Facility and reforms lifting binding constraints. - Medium-term outcomes (average of three- to five-year horizon): - Convergence of current account balances and narrowing of global imbalances. - Global balances fall on average by 0.5 percent of world GDP already three to five years out and continue in subsequent years. - Global growth revised up considerably; inflation and real interest rates are higher globally over the medium term. - Country effects: - United States: fiscal reforms significantly reduce fiscal deficit and increase public saving; improved fiscal position leads to permanent reduction in real interest rates, increasing private investment and raising output. - China: domestic consumption surges; private saving rate reduces considerably; current account balance falls substantially; renminbi real appreciation under flexible exchange rate. - Euro area: investment share of output increases; current account balance falls despite increase in saving share amid higher interest rates. - Overall: simultaneous rebalancing yields best global outcome; world interest rates rise in the medium term (driven mainly by China and the euro area) while US fiscal consolidation’s disinflationary impulse helps keep the increase in global interest rates in check and reverse it in the long term. ### Analysis of unilateral adjustments - Two unilateral cases analyzed: - China moves ahead with domestic rebalancing while rest of world remains on reference path. - United States undertakes fiscal consolidation while other regions follow reference forecast. - Unilateral actions can worsen domestic imbalances in other economies; simulations add illustrative financial risk layers. - China’s rebalancing: higher global interest rates accompanied by a decline in convenience yield on US treasuries, resulting in a higher US sovereign risk premium. - US fiscal consolidation: weaker global demand tightens global financial conditions near term, captured by higher corporate risk premium. - Financial risk layers are illustrative and highly uncertain. ### China adjustment case: key modeled effects - Domestic reforms in China improve growth and reduce current account surplus, generating spillovers. - Higher interest rates in China associated with rebalancing have cross-border effects including potential increases in sovereign and corporate risk premia elsewhere (for example, a higher US sovereign risk premium in the simulation of China moving alone). ### Saving — model responses and scenario findings - Reporting conventions: medium-term responses are average of three- to five-year horizon; short-term one- to two-year horizon. - Saving = sum of private and public saving. Investment = sum of private and public investment. Real interest rate = short-term real interest rate. REER = real effective exchange rate (a decrease represents a depreciation). - China productivity and rebalancing scenario: - China’s domestic reforms meaningfully reduce its CA surplus, narrowing global current account balances. - Higher productivity in China raises global interest rates through spillovers, which increase US private saving more than offsetting lower public saving and lead to a decline in US investment as a share of GDP, improving the US current account. - Risk channel: adverse financial market reactions could amplify spillovers to the United States by increasing the US sovereign risk premium, raising public debt in the United States over the short- and medium-term as debt-servicing costs rise more than improvements in the primary balance. - Quantitative model note: Public debt increases persistently after year six before gradually falling to the initial level. - US adjustment (fiscal consolidation) scenario: - US fiscal consolidation increases the US current account but reduces growth and inflation globally. - Spillovers to China: much lower growth and inflation in China due to weakened external demand; RMB assumed to adjust to a limited extent and appreciates in real terms relative to the euro and other currencies. - Euro area and rest of the world: REER appreciation boosts domestic demand; stronger consumption and investment help offset trade headwinds. - Global real interest rates fall as US fiscal position improves, increasing investment and reducing saving in China, the euro area, and the rest of the world, lowering their current account balances. - Financial-channel risks: fiscal consolidation in the US could tighten global financial conditions in near term if growth weakens; higher corporate risk premia further reduce output and inflation across regions. - Effective lower bound (ELB) risks for China: if ELB binds, growth and inflation in China decline sharply; REER depreciates while real interest rates rise, increasing saving and reducing investment, improving China’s current account—potentially leaving China’s CA broadly unchanged but with weaker output and higher government debt. - Quantitative model note: Real investment declines by about ½ percent in the financial-risk scenario; its share of GDP falls by less due to the fall in output. ### Global aggregate scenario outcomes and policy priorities - Global current account balances narrow across rebalancing scenarios, reflecting declines in both China surplus and US deficit. - Symmetric (simultaneous) rebalancing yields most favorable global outcome: higher global real GDP deviations from baseline than unilateral adjustments. - Continuation of current trends results in significant widening of global current account balances; global output temporarily higher but persistent imbalances increase macrofinancial risks. - Policy priorities to promote external rebalancing: - Correct domestic imbalances in both surplus and deficit economies. - Fiscal consolidation in deficit economies to rebuild fiscal buffers and increase saving. - Market-oriented structural reforms in surplus economies to boost domestic demand, promote investment, and improve growth prospects. - Avoid distortive arrangements (purchase commitments, quantitative restrictions), export controls, and trade barriers that exacerbate supply disruptions. - Maintain clear, transparent, predictable, and mutually beneficial trade frameworks; target trade measures carefully; pursue pragmatic cooperation and update international rules to reflect structural shifts. - Maintain flexible exchange rates; temporary FX intervention or targeted capital flow management measures may be warranted in specific circumstances but should not substitute for macroeconomic adjustments. - Strengthen international monetary system and global financial safety net (GFSN); approval in 2023 of the 16th General Review of Quotas noted as an important step toward fortifying IMF’s role. ### Policy guidance tailored by external position - Economies with stronger-than-warranted external positions (excess surplus): - Promote investment and limit excess saving (examples: fiscal stimulus focused on boosting consumption in China; improving business environment and liberalizing FDI in India; easing regulatory constraints on domestic investment in Germany; raising investment in infrastructure, housing, and R&D in the Netherlands). - In some cases, higher public spending to address aging populations through health care, social safety nets, and human capital investment (Malaysia, Singapore); higher public spending planned for defense (Germany, Sweden) and infrastructure (the Netherlands, Singapore). - Growth-enhancing structural reforms (Spain, Sweden). - Economies with weaker-than-warranted external positions (excess deficit): - Boost saving and competitiveness (example fiscal consolidation to place debt-to-GDP on a downward path in United States, Australia, Belgium, Brazil, Italy, Saudi Arabia, United Kingdom). - Structural policies: remove internal trade barriers and scale up R&D (Canada); enhance productivity via pension, labor, and product-market reforms (Belgium). - Türkiye: tightening monetary and fiscal policy to contain demand and raise saving. - Economies broadly in line: - Continue addressing domestic imbalances to prevent excessive external imbalances. - Fiscal consolidation may be needed to maintain external balance (Hong Kong SAR, Poland, South Africa), alongside structural reforms to improve productivity and increase investment (France, Indonesia, Mexico). - Deepening EU Single Market and completing Banking Union would raise productivity in the euro area. - Switzerland: use fiscal space to support growth if risks materialize; medium-term plan to address structural fiscal needs on aging, climate, and defense. ### Selected key statistics (Table 1.1, current account balances) - Global Current Account Balance (Billions of US Dollars): - 2023: 3,263 - 2024: 4,025 - 2025: 4,374 - 2026 Projection: 4,530 - Global Current Account Balance (Percent of World GDP): - 2023: 3.0 - 2024: 3.6 - 2025: 3.7 - 2026 Projection: 3.6 - United States Current Account (Billions of US Dollars): - 2023: −928 - 2024: −1,185 - 2025: −1,116 - 2026 Projection: −1,200 - United States Current Account (Percent of GDP): - 2023: −3.3 - 2024: −4.0 - 2025: −3.6 - 2026 Projection: −3.7 - China Current Account (Billions of US Dollars): - 2023: 257 - 2024: 462 - 2025: 735 - 2026 Projection: 725 - China Current Account (Percent of GDP): - 2023: 1.4 - 2024: 2.5 - 2025: 3.8 - 2026 Projection: 3.5 - Euro Area Current Account (Billions of US Dollars; memorandum item): - 2023: 265 - 2024: 443 - 2025: 312 - 2026 Projection: 255 - Overall surpluses and deficits: - Overall Surpluses (Billions of US Dollars): 2023: 1,756; 2024: 2,285; 2025: 2,512; 2026 Projection: 2,462 - Overall Deficits (Billions of US Dollars): 2023: −1,502; 2024: −1,787; 2025: −1,872; 2026 Projection: −2,030 ### Net International Investment Position (selected highlights, Table 1.2) - United States NIIP: –16,161 (2022), –20,417 (2023), –26,539 (2024), –27,537 (2025); percent of world GDP: –15.8, –19.1, –23.8, –23.4; percent of GDP: –62.0, –73.4, –90.6, –89.5. - China NIIP: 2,422 (2022), 2,851 (2023), 3,178 (2024), 4,071 (2025); percent of world GDP: 2.4, 2.7, 2.8, 3.4; percent of GDP: 13.2, 15.5, 17.0, 20.7. - Germany NIIP: 2,956 (2022), 3,152 (2023), 3,639 (2024), 4,307 (2025); percent of world GDP: 2.9, 2.9, 3.3, 3.6; percent of GDP: 70.3, 69.1, 77.7, 85.3. - Japan NIIP: 3,101 (2022), 3,263 (2023), 3,495 (2024), 3,693 (2025); percent of world GDP: 3.0, 3.0, 3.1, 3.1; percent of GDP: 69.7, 74.4, 83.4, 83.3. - Euro Area memorandum: 363 (2022), 628 (2023), 1,957 (2024), 1,985 (2025); percent of world GDP: 0.4, 0.6, 1.8, 1.7; percent of GDP: 2.5, 3.9, 11.8, 11.0. - Overall creditors: 19,855 (2022), 22,025 (2023), 25,214 (2024), 27,981 (2025); percent of world GDP: 19.4, 20.6, 22.6, 23.7. - Overall debtors: –24,977 (2022), –30,108 (2023), –34,840 (2024), –36,349 (2025); percent of world GDP: –24.4, –28.1, –31.3, –30.8. ### Box highlights: trade barriers, tariffs, AI-driven trade, and energy shock - Box 1.1 — trade barriers: - Conceptual identity: CA = S − I. - Gravity-implied measures show a ten-percent rise in import barriers reduces CA/GDP by roughly 0.3 percentage points. - Trade barriers associated with both lower saving and lower investment (relative to GDP), muting net CA effects. - Box 1.2 — 2025 tariff episode: - US released broad-based tariffs on April 2, 2025, with global minimum of 10 percent and rates as high as 50 percent; subsequent retaliation caused US tariffs on China to spike briefly at over 130 percent. - Average tariff on US imports stood at over 17 percent at end-2025 — highest in 80 years. - Actual overall US trade deficit: 3.1 percent of GDP in 2025, virtually unchanged from 3.0 percent in 2024. - Intertemporal “front-loading” and “payback” behavior evident pre- and post-announcement. - Tariff-induced reshuffling of trade across partners with substitution away from China toward EU and ROW. - Box 1.2 — AI-driven trade: - AI investment singled out as driver of US domestic demand in 2025; AI-investment defined as sum of private investment in software, information processing equipment, research and development, data centers and power and communication facilities using chained 2017 dollar values. - Counterfactual: if US imports and exports of AI-related goods had grown at same rate as non-AI products in 2025, US trade deficit would have declined by 0.6 percent of GDP absent the AI-boom. - IMF definition for AI-related goods uses HS codes 8419, 8470-8473, and 85. - Box 1.3 — energy price shock (severe scenario based on April 2026 WEO severe scenario): - Brent futures: about $66 per barrel in fall 2025 to $82.6 in March 2026 (April 2026 WEO), and increased further since. - Severe scenario assumption: oil prices increase by about 100 percent starting in Q2 2026 relative to January 2026 WEO Update baseline and remain elevated through 2027 before dissipating in 2028. - Model results (IMF G20 model): - Global growth about 1.3 percentage points lower in 2026. - United States: total impact about −0.6 percent. - Euro area: total output falls about −1.0 percent. - China: total output falls about −0.7 percent. - Inflation increases by as much as 2 percent globally. - External balances: euro area −1.4 percent of GDP; China −0.5 percent of GDP; oil exporters see increases of more than 6 percent of GDP. - Global current account balances increase by around 0.2 percent of world GDP in 2026 and up to 0.5 percent in 2027. - Box 1.4 — excess-adjusted NFA methodology: - Motivation: strip out past excess CA balances from NFA to avoid feedback loop where accumulated excesses justify larger norms. - Iterative construction starting from an anchor year; realized valuation effects applied identically to actual and adjusted NFA. - Stylized three-country example uses estimated NFA coefficient 0.032 (or 0.031 in figures) and assumes 6 percent nominal growth. - Adjusted NFA significantly affects assessed CA gaps only when CA excesses are persistent; in persistent cases headline and adjusted NFA can diverge by around 22 percentage points over a decade, widening assessed CA gap by around 0.6 percentage points. - New methodology will be implemented in next year’s assessment. - Box 1.5 — scenario assumptions (key numerical assumptions): - Scenario 1: Continuation of Current Trends - United States: Investment rises 2.5 percent above reference forecast by 2030 and stays 1 percent higher beyond that; general government deficit increases by 0.5 percent of GDP for five years; public debt increases by 2.5 percent of GDP in the long term. - China: Investment declines by one percent over 3 years; tradable sector productivity loss 0.5 percent. - Euro Area: total factor productivity growth 0.1 percentage point lower per year over five years starting 2026; investment-specific productivity growth declines by 0.05 percentage point per year; private saving rate increases by 1 percentage point by 2030. - Scenario 2: Simultaneous Adjustment - United States: overall fiscal deficit gradually decreases, reaching 1 percent of GDP by fifth year; public debt decreases by 25 percent of GDP in the long term. - China: short-term fiscal expansion about 0.5 percent of GDP followed by consolidation; industrial policy support cut in half. - Euro Area: corporate financing costs permanently reduced by 25 basis points; public investment increases with full utilization of Recovery and Resilience Facility. - China Adjustment Case risk layer: US sovereign interest rate temporarily increases by about 25 basis points. - US Adjustment Case risk layer: corporate risk premiums temporarily rise by up to 30 basis points globally; ELB constraint in China. ### Summary of 2025 individual economy assessments and policy recommendations (selected) - Argentina — Overall 2025 Assessment: Weaker - Policy Recommendations: More balanced stabilization program with emphasis on external stability to rebuild reserves, sustain gradual disinflation, and durably access international capital markets. - Australia — Overall 2025 Assessment: Weaker - Policy Recommendations: Gradual medium-term fiscal consolidation and structural reforms to boost productivity. - Belgium — Overall 2025 Assessment: Substantially weaker - Policy Recommendations: Sustained expenditure-led fiscal consolidation; rebuild fiscal buffers; increase public investment; significant pension, social benefit, tax, labor, product-market, and wage-setting reforms. - Brazil — Overall 2025 Assessment: Moderately weaker - Policy Recommendations: Raise national savings; sustained fiscal consolidation. - Canada — Overall 2025 Assessment: Weaker - Policy Recommendations: Remove internal trade barriers; enhance labor productivity; scale up R&D. - China — Overall 2025 Assessment: Stronger - Policy Recommendations: Fiscal stimulus focused on boosting consumption; scale back inefficient investment and unwarranted industrial policy support; further monetary easing with strong fiscal and structural package; exchange rate flexibility; structural reforms to reduce household savings and boost services investment. - Euro Area — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Deepen EU Single Market; complete Banking Union; improve coordination on public goods investment and reforms to boost investment and demand. - Germany — Overall 2025 Assessment: Stronger - Policy Recommendations: Policies to promote investment and diminish excess saving; structural reforms to ease regulatory constraints. - India — Overall 2025 Assessment: Moderately stronger - Policy Recommendations: Reduce import restrictions on intermediate goods; improve business environment; liberalize FDI; develop trade infrastructure. - Italy — Overall 2025 Assessment: Moderately weaker - Policy Recommendations: Reforms to boost productivity and competitiveness; increase public sector savings supported by public debt reduction. - Japan — Overall 2025 Assessment: Moderately stronger - Policy Recommendations: Structural reforms to reduce labor market duality and boost labor force participation; fiscal adjustment for debt sustainability. - Korea — Overall 2025 Assessment: Stronger - Policy Recommendations: Soft-landing measures for real estate financing; reforms to facilitate AI transition; enhance social protection. - Mexico — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Structural reforms to boost investment; address infrastructure and governance gaps. - Netherlands — Overall 2025 Assessment: Stronger - Policy Recommendations: Raise public and private investment; ease electricity grid and nitrogen-related growth bottlenecks; expand residential investment and R&D. - Poland — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Implement cumulative fiscal adjustment of at least 4 percent of GDP by 2030; reduce fiscal deficit from about 7 percent of GDP in 2025 to 3 percent over the medium term. - Saudi Arabia — Overall 2025 Assessment: Moderately weaker - Policy Recommendations: Fiscal consolidation; diversify economy; boost non-oil exports. - Singapore — Overall 2025 Assessment: Substantially stronger - Policy Recommendations: Higher public investment in health care, green infrastructure, and human capital; strengthen social safety nets. - Spain — Overall 2025 Assessment: Stronger - Policy Recommendations: Sustained fiscal consolidation; growth-enhancing structural reforms including completing single Spanish market; redesign R&D tax credit. - Sweden — Overall 2025 Assessment: Stronger - Policy Recommendations: Enhance private and public investment in productivity-enhancing projects; higher domestic absorption to reduce external imbalances. - Türkiye — Overall 2025 Assessment: Weaker - Policy Recommendations: Tighten monetary and fiscal policy to contain demand, raise savings, and bring down inflation. - United Kingdom — Overall 2025 Assessment: Weaker - Policy Recommendations: Fiscal consolidation path to support external rebalancing; progress in net-zero transition to mitigate energy-related terms of trade shocks. - United States — Overall 2025 Assessment: Weaker - Policy Recommendations: Implement fiscal consolidation aimed at achieving a general government primary surplus of about 1 percent of GDP to put the debt-to-GDP ratio on a downward path and adjust the external position to the level implied by medium-term fundamentals and desirable policies. ### Key numeric policy targets (preserved verbatim) - Poland: Implement a cumulative fiscal adjustment of at least 4 percent of GDP by 2030. - Poland: Reduce the fiscal deficit from about 7 percent of GDP in 2025 to 3 percent over the medium term. - United States: Achieve a general government primary surplus of about 1 percent of GDP. *Source: CHAPTER 1 EXTERNAL POSITIONS AND POLICIES, 2026 EXTERNAL SECTOR REPORT (IMF).* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### Global saving and investment dynamics - Global imbalances have widened amid a decline in saving and only modest changes in investment, contrasting with the early 2000s when both saving and investment rose. - The current pattern resembles adjustment during major real estate corrections (Japan in the 1990s; Spain and the United States after the global financial crisis), with Japan’s case noted as particularly illustrative given its current account surplus prior to the collapse of the housing sector investment. - Household saving has ticked up amid weak consumer confidence about future income and employment prospects, partly offset by lower public saving. - Persistently low returns on capital are consistent with the observed investment decline (IMF 2026a); policy measures aimed at reducing excess capacity and curbing “involution” may also have contributed (IMF 2026b). ### United States: drivers of the current account - The US current account has been driven by the public sector imbalance. - The deficit widened in 2024, driven mostly by a sharp decline in public saving, but narrowed somewhat in 2025. - The 2025 narrowing reflected higher public saving and lower aggregate investment, which more than offset the decline in household saving and an increase in technology-related investment. - Increased tariff revenues contributed to the improvement in public saving. - Household saving remained low and declined further from already low levels partly driven by wealth effects from a buoyant stock market. - Since 2022, public saving has averaged around −0.8 percent of world GDP, compared with 0 percent over 2000–06. - Tech investment in the United States is calculated as the sum of nonresidential private investment in information processing equipment and software (as used in decomposition analyses). ### Euro area: savings, investment, and current account - The euro area’s current account surplus reflects continued weak investment. - Investment declined in 2024 amid weak consumer and business confidence from elevated geopolitical tensions and policy uncertainties, then rebounded in 2025 supported by easing monetary conditions, higher public spending, and inventory accumulation. - The current account decline in 2025 was particularly pronounced in Germany, France, and Ireland; Ireland’s balances are noted as particularly volatile due to distortions from large multinational enterprises. - The euro area’s large current account reflects high private saving (above pre-pandemic averages) and persistently weak investment dynamics, driven in part by subdued productivity growth, demographic headwinds, and structural barriers in some member states. ### Trade barriers, reconfiguration of trade, and policy uncertainty - The recent widening of global balances has taken place amid elevated trade tensions, including a sharp increase in US tariffs, and heightened policy uncertainty — a key distinction from the early 2000s episode of deepening trade and financial globalization. - Empirical evidence over the last four decades suggests no clear relationship between trade barriers in effect in the past and aggregate current account balances (Box 1.1; IMF 2026d). - Since late 2024, the global economy has experienced a significant rise in policy uncertainty and trade barriers (Figures 1.10 and 1.11). - Recent aggregate developments mask pronounced reconfiguration of trade patterns: - Expansion of China’s trade surplus matched by declines in the euro area, Japan, and many other surplus economies. - US trade balance broadly unchanged overall, but imports surged in anticipation of the April 2 tariff announcement (mostly durables as firms built inventories) and moderated thereafter, leaving overall imports as a share of GDP broadly unchanged versus 2024. - Differential tariff rates applied to US trading partners led to a decline in US imports from China offset by increases from the rest of the world. - Shifts in trading partners partly driven by the tech-related investment boom, with the United States increasing imports from Taiwan Province of China, Korea, and Japan. - US tariff changes (measured as change in trade-weighted average tariffs between January 1 and November 14, 2025) are used in cross-country correlation analyses of tariff changes and current account responses. ### Interest rates, financial conditions, and capital flows - Global real interest rates have risen steadily since 2023 as demand for funds from deficit countries outweighs supply from surplus ones. - Saving from surplus countries, notably China, has fallen short of global demand for funds; the United States has been a major driver of demand because of large fiscal deficits and strong technology-related investment. - The current episode of widened global balances has occurred alongside rising real interest rates — a key contrast with the early 2000s when global balances widened while real interest rates fell. - Despite higher global interest rates, global financial conditions eased in 2025, partly reflecting stronger US equity markets; this easing relaxed leverage constraints on global financial intermediaries and enabled greater intermediation of cross-border funding toward higher-return projects. - All else equal, easing financial conditions imply widening global current account balances as deficit economies with high-return opportunities receive higher capital inflows while surplus economies record corresponding current account increases. ### Exchange rates, currency movements, and drivers - The US dollar experienced a strong appreciation in real effective terms in Q4 2024 followed by a sharp depreciation around Q2 2025. - Much of the US dollar depreciation against major advanced-economy currencies between January and the April tariff announcement can be explained by fundamentals (including positive interest rate differentials and upside US growth surprises). - Depreciation following the April tariff announcement points to some disconnect from fundamentals, potentially reflecting shifts in risk sentiment tied to higher policy uncertainty and concerns about the US fiscal trajectory, alongside easing global financial conditions. - The US dollar remains at a high level: close to the 2023–25 average and well above its 2000–25 average (US REER, 2000–25 average = 100; increase = appreciation). - Other major currencies in 2025: - The euro appreciated in nominal effective terms over the first half of the year and remained flat thereafter, potentially reflecting increased demand for euro-denominated assets. - The pound sterling strengthened. - The renminbi depreciated in the first half of the year before appreciating toward year-end following the May trade agreement; overall, it remained broadly stable vis-à-vis the US dollar, implying a real effective depreciation given inflation differentials. - The Japanese yen depreciated in 2025 despite appreciating in the first half of the year; much of the yen movement since mid-2025 remains unexplained by fundamentals and co-moves with positions in the yen futures market. These developments coincided with a greater role of market perceptions of fiscal risk in driving the term premium priced into Japanese yields. - The RMB de jure exchange rate arrangement is “managed floating” with a view to keeping the RMB exchange rate stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies; the floating band of the RMB’s trading prices is 2 percent against the US dollar in the interbank foreign exchange market (IMF 2026b). *Source: CHAPTER 1 EXTERNAL POSITIONS AND POLICIES, 2026 EXTERNAL SECTOR REPORT (IMF).* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### Exchange Rate Pressures and Monetary Policy - Both advanced and emerging market economies faced uniform appreciation pressure in the first half of 2025. - Exchange rate changes were the main outlet for addressing exchange rate pressures; adjusted changes in FX reserves also contributed (examples: Poland, Thailand for appreciation; Korea, China for depreciation). - In the second half of 2025: - Exchange market pressure was two-sided in advanced economies. - Tendency toward appreciation continued in many emerging markets, supported by easing global financial conditions and strong capital flows. - India faced depreciation pressure in the second half of 2025, in part reflecting further tariffs imposed by the United States. - Contribution from monetary policy remained subdued throughout 2025, despite policy rate adjustments across many ESR sample economies. ### Global Financial Flows (2014–25, with 2025 focus) - Gross capital flows increased in 2025 in both emerging and advanced economies as global financial conditions eased. - Net and gross capital flow patterns: - Total net capital flows to emerging markets (EM) increased in 2025, but China remained an outlier with continued negative net capital flows. - Gross inflows to China remained close to zero in 2025, reflecting continued weak inward foreign direct investment (FDI). - China’s gross outflows recovered in line with other emerging economies. - In other emerging markets, gross inflows picked up in 2025 with portfolio and other investment flows (largely banking-related) increasing; gross FDI inflows remained below their pre-COVID-19 average. - United States flows in 2025: - Gross capital inflows to the United States remained robust, with a compositional shift toward equity. - Portfolio inflows were the main driver; equity accounted for the bulk of the increase—consistent with the AI-related investment boom. - Net inflows into US treasuries eased, particularly at longer maturities. - Other advanced economies saw strong pickup in both gross inflows and outflows in 2025, reflecting stronger portfolio and other investment flows. ### Global Balance Sheets and Valuation Effects - Net external creditor and debtor positions narrowed slightly in 2025 after widening in 2024. - United States: - US NIIP-to-GDP ratio narrowed slightly in 2025 as positive FX valuation effects and nominal GDP growth more than offset net financial outflows and price valuation losses. - The United States switched from a net long equity position to a net short one due to strong net capital inflows in equities and persistent asset price outperformance since COVID-19. - Net investment income balance deteriorated to close to zero, consistent with a secular decline of return differential between US external assets and liabilities. - Emerging markets and developing economies (EMDEs): - Increased share of domestic-currency liabilities and growing exposures to US assets imply a US dollar depreciation now tends to have negative effects on their NIIP positions. - EMDEs and other advanced economies are increasingly exposed to asset price movements in US assets as holdings in US equity have become very large. ### Developments in Early 2026 - High-frequency indicators point to a continuation of elevated global current account balances in early 2026: - China recorded another large increase in its trade balance in the first two months of 2026, supported by strong electronics exports. - Korea recorded historical high trade surpluses. - Trade balances in both the United States and the euro area declined in early 2026. - Statistical issues: - Early 2026 trade data indicate a larger statistical discrepancy as the sum of global surplus exceeds the sum of global deficits. - The discrepancy may reflect increased difficulty in measuring trade data and could be revised away over time. - Capital flows in early 2026: - High-frequency data signal continued strong gross portfolio inflow to EMs (excluding China) and a potential recovery of inflows to China. - US tariff developments and trade policy timing: - Following a Supreme Court ruling in February 2026, all tariffs imposed under the authority of the International Emergency Economic Powers Act were invalidated. - The US administration then implemented a 10 percent import surcharge (with certain specific exemptions) under section 122 of the Trade Act of 1974 which may remain in force for up to 150 days. - Taking into account recent changes under section 122, the average applied effective tariff rate on imports into the United States remains at around 7 to 8.5 percent. - The US Administration announced an intent to return to the pre-February status quo. - Middle East war impacts and financial market reaction: - The war created headwinds for a reduction of global current account balances; impact depends on oil price developments and potential second-round effects. - Historically, higher oil prices accompany current account improvements for energy exporters and deteriorations for energy importers. - Energy exporters whose production is directly affected by the war could see narrowing of current account surplus if energy revenues fall and governments provide support. - The United States, as a modest oil exporter, may see its current account deficit narrow given a positive terms of trade shock. - The war led to a moderate tightening of global financial conditions and the dollar appreciated somewhat following the outbreak. - Gross portfolio inflows to EMs dropped in March 2026 with the onset of the war; the decline was broad-based and particularly large in emerging and developing Asia, driven mainly by a reduction in gross portfolio equity inflows. ### Assessment Methodology (EBA refinements) and 2025 External Positions Assessment - Coverage and basis: - The report provides multilaterally consistent individual assessments of external positions for 30 of the world’s largest economies, representing about 90 percent of world GDP. - Assessments are based on the 2026 EBA methodology refinements. - Key methodological refinements in 2026 EBA: - Update and extension of the data. - Improvement in the calculation of the commodity terms of trade gaps. - Revision of the demographic bloc. - Refinements examine the role of trade barriers in current account determination. - Introduction of an excess-adjusted Net Foreign Assets (NFA) with implementation planned for the 2027 External Sector Report. - Revisions affected the classification of inflation bias adjustors; number of adjustors in 2025 decreased compared to 2024 in part due to demographic improvements and reclassification. - Assessment approach: - Current account gaps derived by comparing EBA norms with realized current account after adjusting for cyclical and other temporary factors. - Current account gaps are translated into real exchange rate gaps using estimated semi-elasticities. - Real exchange rate models inform assessments but more weight is placed on current account models given real exchange rate volatility. - IMF staff judgment and country-specific adjustors are applied; residuals and measurement issues can be large. - 2025 assessment results (relative to levels implied by medium-term fundamentals and desirable policies): - Moderately stronger, stronger, or substantially stronger: China, Germany, India, Japan, Korea, Malaysia, the Netherlands, Singapore, Spain, Sweden, and Thailand. - Moderately weaker, weaker, or substantially weaker: Argentina, Australia, Belgium, Brazil, Canada, Italy, Russia, Saudi Arabia, Türkiye, the United Kingdom, and the United States. - Broadly in line: Euro Area, France, Hong Kong SAR, Indonesia, Mexico, Poland, South Africa, and Switzerland. - Drivers of current account gaps in 2025: - Residuals account for a large share of current account gaps in many cases. - Policy gaps remain relevant in some countries (examples: negative credit gap in the Netherlands; weaker social safety nets in Malaysia; larger fiscal deficit in the United States). *Source: CHAPTER 1 EXTERNAL POSITIONS AND POLICIES, 2026 EXTERNAL SECTOR REPORT.* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### Policy Gaps, Residuals, and Spillovers - Policy gap contributions reflect both domestic deviations from desirable policies and the average of deviations across all economies; if all economies simultaneously close their policy gaps, CA gaps adjust in line with estimated contributions from policy gaps. - Unilateral versus multilateral effects: - If the United States closes its fiscal gap, its CA gap would narrow by about 1 percentage point. - If all economies close their fiscal gaps simultaneously, the reduction in the US CA gap would be about 0.5 percentage points. - Residuals capture country-specific considerations not captured by the EBA model and can be positive or negative: - Positive residual examples: China — elevated precautionary saving linked to social safety net weaknesses and a prolonged housing downturn; Germany — regulatory constraints impeding investment and measurement issues related to differential statistical treatment of retained earnings. - Negative residual examples: United States — reserve currency status, deep financial markets, and a frontier position in technological innovation attracting capital inflows; Türkiye — persistently elevated inflation and inflation expectations raising private saving, combined with a positive wealth effect from higher gold prices. - Cross-country spillovers: - EBA variables are defined relative to a GDP-weighted sample average; changes in policies in large economies induce material cross-border spillovers. - If the United States were to close its fiscal gap, the global average fiscal balance would rise, shifting other countries’ fiscal policy gap contributions down by about 0.4 percentage points of GDP. - Residuals can likewise reflect cross-country spillovers from country-specific structural distortions (for example, precautionary saving in China or weak investment in the euro area affecting other economies’ residuals). - Measurement and analysis notes: - Difficulties in measurement, coverage, and assessment of normative stance preclude direct inclusion of some considerations (for example, pension systems, labor or product market regulation) in the EBA CA model; complementary toolboxes and Online Annexes are used to analyze residuals for a subset of countries. ### Current Account Norms in 2025 - Largest contributors to CA norms remain NFA, output per worker, demographics, and desirable policies (which include fiscal policy, public health spending as a proxy for social safety net adequacy, desirable credit gap, and foreign exchange intervention interacted with capital controls). - Changes in norms in 2025 relative to 2024 reflect both 2025 data updates and the 2026 EBA refinements; data update and extension account for the majority of changes, with model specification revisions also important. - The 2026 EBA refinements resulted in norm compression: economies with initially positive CA norms generally saw norms decline, while economies with initially negative norms experienced increases. Three key factors contributing to compression: - Changing demographic trends are the primary driver of compression, reflecting convergence in key demographic variables and rapid demographic transition in emerging markets toward advanced economy patterns. - The estimated relationship between the current account and NFA has modestly weakened, partly reflecting the growing importance of valuation effects in NFA dynamics; NFA remains important for economies with large creditor or debtor positions, but a smaller coefficient reduces its contribution to cross-country dispersion. - Desirable health policies (proxying social safety net strength) contribute to compression by capturing precautionary saving motives strengthened by recent shocks (including the COVID-19 pandemic and the war in Ukraine). - By contrast, output per worker contributes to a widening of norms, reflecting stronger capital outflows from advanced economies to faster-growing economies. - Country-specific drivers are diverse: - Korea and Japan: declines in demographic contributions are main drivers of norm changes. - United States: increases in the norm reflect contributions from demographics, the net foreign asset position, and output per worker. - China: the norm has decreased in part due to a lower contribution from output per worker. ### Global Excess Current Account Balances - Global excess CA balances for ESR economies rose by a further 0.7 percent of ESR GDP in 2025, marking the largest increase in the past decade. - Drivers of the widening in 2025: - Predominantly driven by data revision and extension, reflecting changing relationships between the current account and macroeconomic fundamentals. - Changes in headline current accounts (EBA gaps based on the 2022 model) and revisions to the model specification also played a role. - The increase in excess balances is broad-based but driven predominantly by a widening of excess current account balances in China and the United States: - China: widening reflects a rise in the headline current account balance. - United States: widening driven by the data update and extension. - Other dynamics: - Other economies with negative CA gaps in 2024 also contributed to the increase in excess balances, partly offset by narrowing from economies with positive CA gaps and narrowing in the euro area. - For ESR economies, staff-assessed excess CA balances account for about 2/3 of the overall global CA balances. - Changes in CA gaps between 2024 and 2025 were driven primarily by changes in the actual current account, accounting for about 60 percent of the variation. ### Outlook and Risks - April 2026 World Economic Outlook reference forecast: - Global current account balances are projected to narrow over the medium term. - Among surplus countries, especially China, Japan, Korea, and the euro area are projected to reduce current account surpluses; oil exporters are projected to see shrinking surpluses over the medium term, with a short-lived uptick in 2026 due to a recent energy price spike. - Major deficit economies such as the United States and the United Kingdom are projected to reduce their deficits. - Some emerging markets (for example, India and Indonesia) are projected to have widening current account deficits, partly offsetting global narrowing. - Contributing factors to projected narrowing: - Projected medium-term fiscal consolidation in current account deficit economies and fiscal expansion in current account surplus economies are expected to contribute about 0.2 percentage points of projected narrowing of global balances. - Waning cyclical factors are expected to contribute about 0.05 percentage points to the decline in the global balance, as output gaps are currently considerably more negative in surplus economies. - The projected decline in global balances contributes only modestly to narrowing excess global balances; structural factors (including convergence of demographic drivers) contribute to larger narrowing of desired current account balances. - Projected fiscal adjustment accounts for about 10 percent of the EBA-estimated excess global balances. - Risks of large and persistent global imbalances: - Globally sizable increases in excess CA balances, reflecting domestic imbalances, can indicate uneven growth drivers and a macro environment that may give rise to macro, financial, or fiscal stability risks warranting policy adjustments. *Source: IMF staff assessments and External Balance Assessment estimates, CHAPTER 1 EXTERNAL POSITIONS AND POLICIES.* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### Risks from Excess Current Account (CA) Balances - Excess CA surpluses can signal inefficient resource allocation and contribute to systemic macrofinancial risks by depressing real interest rates, tilting investors toward riskier assets, and increasing leverage. - Large and persistent excess CA deficits are particularly concerning when they risk unwinding disorderly, often associated with abrupt capital flow reversals, sharp asset price corrections, and deep economic downturns. - Excess CA balances can heighten the risk of sudden stops or capital flow reversals, especially in economies with negative NIIP. - Increased CA surplus in large countries can alter policy tradeoffs for trading partners and lead to negative spillovers on economic activity when trade partners’ monetary policy is constrained (for instance, by the effective lower bound). - Rapid increases in CA surpluses can have disproportionate negative effects on specific bilateral trade partners or sectors; swift adjustments are frequently associated with substantial short-term dislocations. - Large global imbalances can carry political economy risks, including protectionist sentiment arising from concentrated regional or sectoral employment losses. - Sectoral imbalances in key industries (e.g., semiconductors, electronics) can fuel concerns of unfair competition or excessive dependence and may provoke defensive responses such as tariffs or retaliatory subsidies, potentially escalating into mutually distortive policy spirals. ### Scenario: Continuation of Current Trends - Context: Model simulation studies impact on global balances if major economies continue with current policies; World Economic Outlook forecasts for global current account balances have tended to exhibit a downward bias, with the April 2024 and April 2025 WEO projections for global current account balances 0.7 and 0.4 percent of world GDP, respectively, below the outturns in 2024 and 2025. - Assumptions in the scenario: - United States: intensification of the tech- and AI-driven boom (AI-boom) driven by domestic demand and productivity gains, plus a renewed fiscal expansion on top of already robust consumer spending and large fiscal deficits. The general government deficit is expected to remain in the 7- 7½ percent of GDP range over the medium term in the 2026 United States IMF Staff Report. - China: weaker domestic demand with weaker consumption, a protracted property sector downturn, diminishing returns to investment despite industrial production incentives, and limited currency adjustment. - Euro area: persistently weak productivity growth and subdued investment. - Simulated medium-term outcomes (average of the three- to five-year horizon; short-term refers to one- to two-year horizon): - Global current account balances widen further by about 0.4 percent of world GDP over the medium term, with contributions from China, the euro area, and the United States. - Global real interest rates decline marginally. - Global output rises temporarily but is accompanied by a buildup of inefficiencies and risks. - Country/region-specific mechanics: - United States: - Renewed fiscal expansion reduces saving, supporting domestic demand; demand effect largely offset by increased interest rates and reduced investment. - AI-boom raises investment and import demand, leading to a depreciation of the dollar (REER) that offsets some pressures from stronger domestic demand. - Current account deficit widens; output increases. - International spillovers are positive for Emerging Asia as main supplier for AI-related imports; output and inflation increase globally, especially in Latin American and Asian countries. - Spillovers from fiscal expansion in medium term limited; financial channel (permanently higher real interest rate associated with increased public debt) dominates. - China: - Worsening domestic demand increases private saving; diminishing returns and protracted weak real estate investment moderately reduce investment. - Current account surplus widens; limited nominal exchange rate adjustment leads to REER depreciation as deflationary pressure increases. - Output held up by strong net exports; spillovers to other regions are positive via lower global real interest rates reflecting permanently higher saving in China. - Euro area: - Dimmer growth prospects lead households to increase saving; real investment falls but less as share of GDP since output falls. - Current account increases; spillovers mainly via persistently higher saving raising global investment and lowering saving elsewhere, producing small positive output spillovers. - Model notes: - Figures report deviations from baseline; responses captured as average of three- to five-year horizon for medium-term. ### Benefits of Collective Actions - Large and persistent excess global imbalances call for policy actions; the mode of adjustment matters. - Well-calibrated, simultaneous policies across economies support gradual and orderly rebalancing, limit adverse spillovers, and support global growth. - If simultaneous actions are not available, unilateral adjustment remains desirable but can exacerbate domestic imbalances elsewhere, increasing the case for others to take appropriate actions. ### Simultaneous Adjustment Scenario - Scenario assumptions: - United States: expenditure-driven fiscal consolidation while AI-driven boom continues. - China: increase social spending, support transition in residential sector, roll back industrial policy, increase business dynamism; renminbi adjusts flexibly. - Euro area: higher public investment via full utilization of Recovery and Resilience Facility and fiscal space in some member countries; EU-level and national reforms lift binding constraints to growth. - Medium-term outcomes (average of the three- to five-year horizon): - Convergence of current account balances and narrowing of global imbalances. - Global balances fall on average by 0.5 percent of world GDP already three to five years out and continue in subsequent years. - Global growth is revised up considerably; inflation and real interest rates are higher globally over the medium term. - Country/region-specific effects: - United States: - Fiscal reforms significantly reduce fiscal deficit and increase public saving, improving current account balance. - Growth headwinds offset by increased private demand via AI-driven boom. - Improved fiscal position leads to permanent reduction in real interest rates, increasing private investment and raising output. - International spillovers are limited. - China: - Domestic consumption surges; consumption share of GDP rises due to strengthened social safety nets and structural reforms enhancing business dynamism and productivity. - Private saving rate reduces considerably; investment improves but falls as a share of GDP. - Current account balance falls substantially; renminbi real appreciation under flexible exchange rate. - Higher global real interest rates from China's reforms lead to increased saving and reduced investment in US, euro area, and rest of the world, improving their current accounts; output spillovers limited. - Euro area: - Investment share of output increases as reforms lift growth constraints; imports increase and net exports fall. - Current account balance falls despite an increase in saving share amid higher interest rates. - Permanently higher investment in euro area increases global real interest rates, leading to higher saving and lower investment elsewhere, raising current accounts in China, the United States, and rest of the world. - Overall: - A simultaneous rebalancing yields the best global outcome: the drag from US fiscal consolidation is offset by stronger activity in China and the euro area; world interest rates rise in the medium term (driven mainly by China and the euro area) while disinflationary impulse from US fiscal consolidation helps keep the increase in global interest rates in check and reverse it in the long term. ### Analysis of Unilateral Adjustments - Questions explored: implications when a single country acts unilaterally while others follow reference forecast policies. - Two cases analyzed: - China moves ahead with domestic rebalancing while rest of world remains on reference path. - United States undertakes fiscal consolidation while other regions follow reference forecast. - Unilateral actions can worsen domestic imbalances in other economies; simulations assume an additional layer of financial risks on top of unilateral actions. - For China’s rebalancing: higher global interest rates are accompanied by a decline in the convenience yield on US treasuries, resulting in a higher US sovereign risk premium. - For US fiscal consolidation: weaker global demand tightens global financial conditions in the near term, captured by higher corporate risk premium. - These financial risk layers are illustrative and highly uncertain. ### China Adjustment Case (summary of modeled effects) - Domestic reforms in China improve growth and reduce current account surplus, generating spillovers (medium-term responses depicted in Figure 1.43). - Higher interest rates in China associated with rebalancing have cross-border effects including potential increases in sovereign and corporate risk premia elsewhere (for example, a higher US sovereign risk premium in the simulation of China moving alone). *Source: CHAPTER 1 EXTERNAL POSITIONS AND POLICIES, 2026 External Sector Report (IMF) — ch1 - CHAPTER 1 EXTERNAL POSITIONS AND POLICIES* ### 3. Saving ### 3. Saving ### Model responses and horizons - Figures report responses as deviations from baseline. - Medium-term responses are captured as the average of the three- to five-year horizon; short-term refers to the one- to two-year horizon. - Reported model responses cover four countries/regions: (1) China, (2) the euro area, (3) the United States, and (4) the rest of the world. - Saving = sum of private and public saving. Investment = sum of private and public investment (components not reported separately). Real interest rate = short-term real interest rate. REER = real effective exchange rate (a decrease represents a depreciation). - Source of calculations: IMF staff calculations. ### Key scenario findings — China productivity and rebalancing - China’s domestic reforms meaningfully reduce its current account (CA) surplus, narrowing global current account balances. - Higher productivity in China raises global interest rates through spillovers, which: - Increase US private saving (higher interest rates) more than offsetting lower public saving. - Lead to a decline in US investment as a share of GDP, improving the US current account. - Leave US output broadly unchanged as positive demand spillovers offset upward pressure on global interest rates. - Risk channel: adverse financial market reactions could amplify spillovers to the United States by increasing the US sovereign risk premium, which: - Leads to larger increases in interest rates, exerting further downward pressure on US inflation and growth. - Raises public debt in the United States over the short- and medium-term as debt-servicing costs rise more than improvements in the primary balance. - Quantitative model note: Public debt increases persistently after year six before gradually falling to the initial level. ### Key scenario findings — US Adjustment (fiscal consolidation) - US fiscal consolidation increases the US current account but reduces growth and inflation globally (Figure 1.44, blue bars). - Spillovers to China: - Much lower growth and inflation in China due to weakened external demand. - RMB is assumed to adjust to a limited extent; in real terms the renminbi depreciates, particularly relative to the euro and other currencies, supporting net exports and partially cushioning output losses. - In the euro area and rest of the world: - REER appreciation boosts domestic demand; stronger consumption and investment help offset trade headwinds and limit output losses. - Global real interest rates fall as US fiscal position improves (Figure 1.45), which: - Increases investment and reduces saving in China, the euro area, and the rest of the world, lowering their current account balances. - Financial-channel risks: - Fiscal consolidation in the US could tighten global financial conditions in the near term if growth weakens (Figure 1.44, red bars). - Higher corporate risk premia further reduce output and inflation across regions, disproportionately affecting economies with low growth and deflationary pressures. - Effective lower bound (ELB) risks for China: - If the ELB binds and monetary policy cannot be eased (Figure 1.44, green bars), growth and inflation in China decline sharply. - Consistent with lower inflation, REER depreciates while real interest rates rise, increasing saving and reducing investment, which improves China’s current account—more than offsetting the reduction in China’s surplus associated with US fiscal adjustment and tighter global financial conditions. - Net effect: US fiscal adjustment can leave China’s current account broadly unchanged when the ELB is binding, but with significantly weaker output and higher government debt. - Quantitative model note: Real investment declines by about ½ percent in the financial-risk scenario; its share of GDP falls by less due to the fall in output. ### Global aggregate scenario outcomes - Global current account balances narrow across rebalancing scenarios, reflecting declines in both the China surplus and the US deficit. - A symmetric (simultaneous) rebalancing yields the most favorable global outcome: mutually reinforcing policy actions reduce global imbalances while supporting stronger growth (Figure 1.46). - Simultaneous Adjustment yields higher global real GDP deviations from baseline than unilateral adjustments (see Figure 1.46 axes labeled Global Real GDP (Percent)). - Continuation of current trends would result in a significant widening of global current account balances; while global output is temporarily higher, persistent imbalances increase macrofinancial risks and widen net external creditor and debtor positions. ### Policy priorities for promoting external rebalancing - Correcting external imbalances requires addressing underlying domestic imbalances in both surplus and deficit economies: - Fiscal consolidation in deficit economies rebuilds fiscal buffers and increases saving. - Market-oriented structural reforms in surplus economies boost domestic demand, promote investment, and improve growth prospects. - Distortive arrangements (purchase commitments, quantitative restrictions), export controls, and trade barriers that exacerbate supply disruptions should be avoided. - Trade policy recommendations: - Maintain clear, transparent, predictable, and mutually beneficial trade frameworks. - Target trade measures carefully when addressing cross-border spillovers (including from industrial policies). - Pursue pragmatic cooperation to safeguard global commons and update international rules to reflect structural shifts (growing role of services) and align with policies that bolster job growth and supply chain resilience. - Trade negotiations at bilateral, regional, and plurilateral levels should aim to reduce frictions and minimize distortive provisions. - Exchange rate and macroprudential guidance: - Maintaining flexible exchange rates can facilitate adjustment to external shocks. - Temporary foreign exchange intervention or targeted capital flow management measures may be warranted in specific circumstances but should not substitute for necessary macroeconomic adjustments or the development of domestic macroprudential policies. - International monetary system and global financial safety net: - A well-functioning international monetary system is essential; it must continue to provide global public goods, including the global financial safety net (GFSN). - The approval in 2023 of the 16th General Review of Quotas was an important step toward fortifying the IMF’s role in the GFSN; implementation awaits necessary consents from members to their respective quota increase. ### Policy guidance tailored by external position - Economies with stronger-than-warranted external positions (excess surplus): - Focus on policies that promote investment and limit excess saving. - Example measures: fiscal stimulus focused on boosting consumption (China); improving the business environment and liberalizing FDI (India); easing regulatory constraints on domestic investment (Germany); raising investment in infrastructure, housing, and R&D (the Netherlands). - In some cases, higher public spending is needed to address aging populations through health care, social safety nets, and human capital investment (Malaysia, Singapore); higher public spending is also planned for defense (Germany, Sweden) and infrastructure (the Netherlands, Singapore). - Growth-enhancing structural reforms (e.g., completing the single market, supporting innovation in Spain; expanding productivity-enhancing investment in Sweden) help reduce excess surpluses. - Economies with weaker-than-warranted external positions (excess deficit): - Focus on policies that boost saving and competitiveness. - Example measures: fiscal consolidation to place debt-to-GDP on a downward path (United States, Australia, Belgium, Brazil, Italy, Saudi Arabia, United Kingdom). - Structural policies: remove internal trade barriers and scale up R&D (Canada); enhance productivity via pension, labor, and product-market reforms (Belgium). - In Türkiye, tightening monetary and fiscal policy would help contain demand and raise saving. - Economies broadly in line with fundamentals: - Continue addressing domestic imbalances to prevent excessive external imbalances. - Fiscal consolidation may be needed to maintain external balance (Hong Kong SAR, Poland, South Africa), alongside structural reforms to improve productivity and increase investment (France, Indonesia, Mexico). - Deepening the EU Single Market and completing the Banking Union would raise productivity in the euro area. - In Switzerland, use fiscal space to support growth if risks materialize, with a medium-term plan to address structural fiscal needs on aging, climate, and defense. ### Selected key statistics from Table 1.1 (current account balances) - Global Current Account Balance (Billions of US Dollars): - 2023: 3,263 - 2024: 4,025 - 2025: 4,374 - 2026 Projection: 4,530 - Global Current Account Balance (Percent of World GDP): - 2023: 3.0 - 2024: 3.6 - 2025: 3.7 - 2026 Projection: 3.6 - United States Current Account (Billions of US Dollars): - 2023: −928 - 2024: −1,185 - 2025: −1,116 - 2026 Projection: −1,200 - United States Current Account (Percent of GDP): - 2023: −3.3 - 2024: −4.0 - 2025: −3.6 - 2026 Projection: −3.7 - China Current Account (Billions of US Dollars): - 2023: 257 - 2024: 462 - 2025: 735 - 2026 Projection: 725 - China Current Account (Percent of GDP): - 2023: 1.4 - 2024: 2.5 - 2025: 3.8 - 2026 Projection: 3.5 - Euro Area Current Account (Billions of US Dollars; memorandum item): - 2023: 265 - 2024: 443 - 2025: 312 - 2026 Projection: 255 - Overall surpluses and deficits: - Overall Surpluses (Billions of US Dollars): 2023: 1,756; 2024: 2,285; 2025: 2,512; 2026 Projection: 2,462 - Overall Deficits (Billions of US Dollars): 2023: −1,502; 2024: −1,787; 2025: −1,872; 2026 Projection: −2,030 - Note: “. . .” indicates data not available or not applicable. *Source: IMF staff calculations; IMF, April 2026 World Economic Outlook; national authorities (data as presented in the chapter).* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### Net International Investment Position (selected highlights from Table 1.2) - United States NIIP: –16,161 (2022), –20,417 (2023), –26,539 (2024), –27,537 (2025); corresponding percent of world GDP: –15.8, –19.1, –23.8, –23.4; percent of GDP: –62.0, –73.4, –90.6, –89.5. - China NIIP: 2,422 (2022), 2,851 (2023), 3,178 (2024), 4,071 (2025); percent of world GDP: 2.4, 2.7, 2.8, 3.4; percent of GDP: 13.2, 15.5, 17.0, 20.7. - Germany NIIP: 2,956 (2022), 3,152 (2023), 3,639 (2024), 4,307 (2025); percent of world GDP: 2.9, 2.9, 3.3, 3.6; percent of GDP: 70.3, 69.1, 77.7, 85.3. - Japan NIIP: 3,101 (2022), 3,263 (2023), 3,495 (2024), 3,693 (2025); percent of world GDP: 3.0, 3.0, 3.1, 3.1; percent of GDP: 69.7, 74.4, 83.4, 83.3. - Euro Area memorandum: 363 (2022), 628 (2023), 1,957 (2024), 1,985 (2025); percent of world GDP: 0.4, 0.6, 1.8, 1.7; percent of GDP: 2.5, 3.9, 11.8, 11.0. - Overall creditors: 19,855 (2022), 22,025 (2023), 25,214 (2024), 27,981 (2025); percent of world GDP: 19.4, 20.6, 22.6, 23.7. - Overall debtors: –24,977 (2022), –30,108 (2023), –34,840 (2024), –36,349 (2025); percent of world GDP: –24.4, –28.1, –31.3, –30.8. ### Box 1.1 — Trade Barriers and the Current Account: conceptual framing and measurement - Conceptual identity: CA = S − I (current account equals aggregate saving minus aggregate investment). - Two key determinants of trade barriers’ impact on CA: - Scope: trade barriers limited to select products or bilateral relationships may have limited aggregate external-balance impact. - Perceived duration: temporary barriers tend to raise national saving (postponed consumption) and can temporarily improve the CA; permanent barriers may reduce investment and can also lower saving (via terms-of-trade improvements or redistributed tariff revenue), making the net effect ambiguous. - Measurement approach: a catch-all measure of trade barriers inferred from bilateral trade flows using the gravity model (Eaton and Kortum 2002; Waugh 2010; Boz and others 2019), aggregated into overall import and export barriers using lagged bilateral trade shares. - Advantages: comparable across countries/time; captures tariffs, NTMs, industrial policies that distort international vs domestic trade; applicable to goods and services. - Limitations: relies on structural gravity stability; cannot identify whether asymmetries originate with importer or exporter; cannot unpack heterogeneous effects of individual factors; potential endogeneity. - Empirical checks: gravity-based trade barrier measures reflect trade policy changes and display expected macro correlations (see Online Annex Table 1.7.1 and 1.7.2). ### Box 1.1 — Empirical integration into the EBA current account model - Main empirical result: when gravity-implied import and export barriers are incorporated into the 2019 External Balance Assessment (EBA) current account regression, they are statistically significant but economically modest. - Key quantitative findings: - A ten-percent rise in import barriers reduces CA/GDP by roughly 0.3 percentage points. - Table 1.1.1 (selected coefficients from EBA regressions, updated data 1986–2019): - Export barriers: 0.006 (column 2), 0.028** (column 3) [standard errors: 0.009 and 0.013 respectively]. - Import barriers: –0.028*** (column 2), –0.033*** (column 3) [standard errors: 0.007 and 0.007 respectively]. - R2: 0.513 (column 2), 0.539 (column 3), 0.115 (column 4). - Observations: 1,404 in each column. - Table 1.1.2 (impact on saving and investment, estimations without EBA controls): - Export barriers: Saving/GDP coefficient –0.022 [0.016]; Investment/GDP coefficient –0.055*** [0.016]. - Import barriers: Saving/GDP coefficient –0.084*** [0.008]; Investment/GDP coefficient –0.054*** [0.008]. - Interpretation: - Adding trade barriers yields little additional explanatory power over existing EBA variables (columns 2 and 3), and the increase in explanatory power is much smaller than that from regressing CA/GDP only on trade barriers (column 4), suggesting EBA may already capture some trade-barrier effects via indirect channels. - Trade barriers are associated with both lower saving and lower investment (relative to GDP), muting net CA effects. - Gravity-implied trade-barrier shocks are estimated to be very persistent. - Policy/research implications and suggested future work: - Develop and apply structural models to better identify trade barriers and macro-relevant industrial policies and to isolate quantitatively significant channels affecting current accounts. - Construct more granular measures of trade barriers that separate transitory and permanent components and distinguish aggregate export and import costs. - Examine recent significant policy episodes in a granular fashion to inform theory and estimation of trade-barrier–current-account relationships. - Econometric/interpretation note: some channels (for example, import-cost-induced REER appreciation or expected-future-growth effects) may already be captured by EBA controls such as lagged REER or expected growth variables. ### Box 1.2 — Trade Patterns and Trade Balances in 2025 (major developments and dynamics) - Historic tariff shift in 2025: - US administration released a schedule of broad-based tariffs on April 2, 2025, with a global minimum of 10 percent and rates as high as 50 percent on some countries. - Subsequent retaliation by China and US response caused US tariffs on China to spike briefly at over 130 percent. - Average tariff on US imports stood at over 17 percent at end-2025 — the highest level in 80 years. - Stated objective vs outcome: - One stated objective of the US tariffs was to reduce the persistent US trade deficit by reducing imports relative to exports. - Actual overall US trade deficit: 3.1 percent of GDP in 2025, virtually unchanged from 3.0 percent in 2024. - Despite little net change in the annual deficit, 2025 saw a significant tariff-induced reshuffling of trade across time and space. - Intra-year dynamics — front-loading and payback: - The April 2 announcement was widely anticipated, prompting intertemporal substitution of goods imports: - “Front-loading”: US imports surged ahead of the tariff announcement as firms ran up inventories, particularly imports of durables. - “Payback”: more modest imports in later quarters offset the surge. - These intertemporal shifts accounted for most intra-year fluctuation in the US trade balance. - Cross-partner substitution and geographic reconfiguration: - Sharp decline in US imports from China, the major economy that faced the largest US tariff increases. - US imports from the EU expanded broadly in line with world GDP growth. - US imports from the rest of the world (ROW) grew more rapidly, replacing most of the shortfall in imports from China. - China’s exports kept pace with world GDP growth; evidence suggests some previously US-bound exports were diverted to the EU and to the rest of the world including ASEAN economies. - Trade in gold was volatile in 2025 but contributed only 0.4, 0.4, and 0.3 percentage points to US import growth, China export growth, and EU import growth respectively in 2025 — similar to previous years. - Comparative historical context: - The 2025 Q2 US tariff shock produced a distinct intra-year pattern compared with three historical US tariff episodes (1971:Q3, 1975:Q1, 2018:Q1), with larger anticipated and realized front-loading behavior in 2025. - Data and sources noted in figures and analysis: - US import tariffs by source in 2025: series for China, European Union, and ROW; sources include WTO-IMF Tariff Tracker and IMF staff calculations. - Quarterly cyclical changes in US net trade balance shown relative to historical tariff-shock episodes, using Federal Reserve Economic Data, Schmitt-Grohé and Uribe (2025), and IMF staff calculations. - Goods trade flows and partner growth comparisons use Bureau of Economic Analysis; IMF, World Economic Outlook database; Trade Data Monitor; and IMF staff calculations. *Source: CHAPTER 1 EXTERNAL POSITIONS AND POLICIES, 2026 EXTERNAL SECTOR REPORT (IMF).* ### Box 1.2 (continued) ### Box 1.2 (continued) ### Tariffs and Exchange Rates: Aggregate vs Bilateral Effects - Textbook macroeconomic models predict that the negative effect on imports from tariffs should be offset by an appreciation of the exchange rate, leaving the overall trade balance largely unaffected. - Empirical observation: The US dollar depreciated in the wake of the April 2 tariff announcement, reversing a multi-month appreciation, leaving the dollar at the end of 2025 at roughly the same value relative to a basket of major currencies as in early 2024 (Figure 1.17). - Interpretation: The exchange rate played at best a neutral role in stabilizing the US trade balance at the aggregate level. ### AI-driven Trade and US Trade Balance - Role of AI investment in 2025: - AI investment stood out as the driver of growth in US domestic demand in 2025, increasing its contribution compared to 2022–24 while contributions from private consumption, non-AI private investment, and government expenditure declined (Figure 1.2.4, panel 1). - AI-investment is derived as the sum of private investment in software, information processing equipment, research and development, data centers and power and communication facilities using chained 2017 dollar values. - Quantitative counterfactual accounting exercise: - Assuming US imports and exports of AI-related goods had grown at the same rate as non-AI products in 2025, everything else constant, the US trade deficit would have declined by 0.6 percent of GDP absent the AI-boom, largely due to a decline in imports. - This result is robust across alternative classifications of AI-related products (IMF, Federal Reserve, Waugh definitions) shown in Figure 1.2.4, panel 2. - Definitions used for AI-related goods in Figure 1.2.4, panel 2: - IMF definition assumes HS codes 8419, 8470-8473, and 85 to be AI-related. - Fed definition follows de Soyres, Hagg, Liu, and Van Leemput (2026) and assumes HS codes 847150, 847180, and 847330 to be AI-related. - Waugh definition follows Waugh (2026) which uses an LLM to classify AI-related goods. ### Trade-Partner Spillovers and Bilateral Outcomes - Bilateral currency behavior in 2025: - The dollar appreciated in relative terms against currencies of countries whose exports were more exposed to US tariff increases (Figure 1.2.5), which may have helped level tariff effects across US trade partners. - Bilateral goods trade balances: - Among 28 major US trade partners, the average change in their bilateral goods trade balance with the US between 2024 and 2025 was about 0.5 percentage points of GDP. - The direction of this change was uncorrelated with their exposure to US tariffs (Figure 1.2.5). - Consequently, there is little evidence of an impact from US tariffs on trade partners’ current account balances (Figure 1.24). - Overall assessment: - There is limited evidence so far of an effect from tariffs on global imbalances in trade and capital flows. - This is consistent with economic theory and prior evidence suggesting the effect of changes in trade barriers on external imbalances is small and highly contingent. ### Box 1.3 — Energy Price Shock and External Balances: Scenario and Model Results - Context and observed price movements: - Conflict in the Middle East led to a sharp and unexpected increase in energy prices; Brent oil futures for July 2026 rose from about $66 per barrel in fall 2025 to $82.6 in March 2026 (April 2026 World Economic Outlook), and have increased further since (Figure 1.3.1). - Severe scenario assumptions (based on IMF’s G20 model and the April 2026 WEO severe scenario): - Oil prices increase by about 100 percent starting in Q2 2026, relative to the January 2026 WEO Update baseline, and remain elevated through 2027 before dissipating in 2028. - Gas prices in Europe and Asia, as well as food prices, also increase. - One-year-ahead inflation expectations ratchet up by as much as 100 basis points in advanced economies by 2027 and by as much as 130 basis points in emerging markets excluding China, by 2027. - A significant risk-off episode pushes up corporate premiums in advanced economies and in China; emerging markets excluding China experience a widening in sovereign spreads and an even larger increase in corporate spreads. - Monetary policy response is geared toward containing inflationary pressures rather than stabilizing output. - Model results (IMF G20 model): - Global growth is about 1.3 percentage points lower in 2026, with about half the effect coming from the energy shock and the remainder from second-round effects and the risk-off episode. - Country-specific output impacts (total effect including second-round and risk-off): - United States: small positive direct effect from energy shock (modest net oil exporter in 2026) but total impact is negative, about −0.6 percent. - Euro area: output falls about −1.0 percent total (direct energy shock about −0.5 percent). - China: output falls about −0.7 percent total (direct energy shock about −0.5 percent). - Energy exporters: real GDP declines reflecting production disruptions, though higher prices boost nominal income. - Inflation and policy rates: - Inflation increases by as much as 2 percent globally. - Policy rates generally increase, especially because of higher inflation expectations. - External balance effects: - Impact on current accounts driven primarily by the energy price shock layer. - United States’ current account impact limited; US dollar appreciates against major currencies, increasing the US REER. - Large energy importers see negative impacts on current accounts: euro area −1.4 percent of GDP; China −0.5 percent of GDP (mostly from a fall in aggregate saving as households cushion consumption). - Oil exporters see large positive current account impacts (more than 6 percent of GDP) reflecting increased aggregate saving. - Global aggregates: - The energy shock increases global current account balances by around 0.2 percent of world GDP in 2026, and up to 0.5 percent in 2027 (Figure 1.3.3). - While some oil exporters had current account deficits in 2025 (notably Saudi Arabia), the shock raises oil exporters’ current accounts to strong surpluses, widening global imbalances. - For major deficit economies, effects vary: Canada moves from deficit to a small surplus; deficits in Australia and the United Kingdom widen. - For the United States, the current account deficit increases only slightly as percent of GDP but contributes to widening global imbalances given the economy’s size. ### Box 1.4 — Adjusted Net Foreign Assets (NFA) Methodology: Motivation, Construction, and Implications - Motivation: - The EBA framework regresses the current account (CA) to GDP ratio on cyclical variables, medium-term structural features, policy variables, and the lagged NFA. - Lagged NFA absorbs persistent cross-country differences not captured by observables—the cumulative imprint of slow-moving steady-state drivers. - Problem identified: Headline NFA reflects both steady-state fundamentals and accumulated past excess imbalances (deviations from norms). The positive coefficient on NFA in the EBA regression creates a feedback loop: persistent excesses accumulate into larger NFA that then justify greater imbalances by shifting the CA norm, gradually explaining away persistent excesses. - Solution: Construct excess-adjusted NFA from accumulated CA norms, stripping out past excess CA balances, and base the CA gap on this adjusted NFA to break the feedback loop. - Mechanism: When a country runs CA above its norm, headline NFA accumulates faster than adjusted NFA; the divergence raises the assessed CA gap rather than being absorbed into a larger justified norm. - Methodology (iterative construction; formal expressions in Section 1.6 of Online Annex 1.1): - Starting from an anchor year, adjusted NFA is built by accumulating CA norms year by year, with each year’s norm corrected to use the adjusted lagged NFA in place of the actual one to ensure internal consistency. - Realized valuation effects are applied identically to actual and adjusted NFA, so the gap between the two reflects cumulated excess CA flows alone. - The resulting NFA adjustment, which removes the part of the CA norm driven by past excesses, is used to recalculate the headline CA gap. - Key required inputs: an initial NFA position in the anchor year and a sequence of CA norms—both involve methodological choices with material trade-offs. - Impact on EBA results (stylized three-country example): - Example setup uses estimated NFA coefficient from EBA (0.032) and assumes 6 percent nominal growth. Initial NFA positions: +20 percent (Country A), −20 percent (Country B), and 0 (Country C). - Country A (Persistent Surplus): actual CA = 4.5 percent and norm = 1.0 percent, implying a persistent 3.5pp excess surplus. - Country B (Persistent Deficit): mirror of Country A with actual = −4.5 percent and norm = −1.0 percent, implying a persistent 3.5pp excess deficit. - Country C (Transitory): actual CA swings ±1 percent and norm = 0 percent, implying transitory excess imbalances. - For multilateral consistency in any given year, the counterpart of Country C’s transitory gap is allocated equally between Countries A and B, so CA gaps sum to zero across countries by construction. - Findings: - Adjusted NFA significantly affects assessed CA gaps only when CA excesses are persistent. - In the transitory case (Country C) headline and adjusted NFA paths remain closely aligned, producing virtually identical CA gaps (Figures 1.4.1 and 1.4.2). - In persistent excess cases (Countries A and B), headline and adjusted NFA diverge by around 22 percentage points over a decade, widening the assessed CA gap by around 0.6 percentage points, with the correction accumulating gradually over time. - Implementation trade-offs and challenges: - Implementation presents tradeoffs among five dimensions: 1. Addressing the normative inconsistency from the feedback loop. 2. Containing accumulation uncertainty embedded in the excess-adjusted NFA. 3. Preserving multilateral consistency of the EBA exercise. 4. Maintaining even-handed treatment of EBA sample countries. 5. Incorporating past staff judgment into the excess-adjusted NFA construction procedure. - Two choices are particularly consequential (details and formal expressions in Online Annex 1.1). - Policy relevance: - The adjusted NFA methodology breaks a mechanical channel that could otherwise normalize persistent excesses and deficits in external assessments, thereby sharpening detection of genuine persistent CA gaps. - The new methodology will be implemented in next year’s assessment. *Source: IMF 2026 External Sector Report, Chapter 1 (Box 1.2 continued; Box 1.3; Box 1.4).* ### Box 1.4. An Excess-Adjusted NFA in EBA ### Box 1.4. An Excess-Adjusted NFA in EBA ### Rationale and methodology for excess-adjusted NFA - Purpose: Resolve a normative inconsistency by adjusting lagged NFA used in EBA to account for historical excess current account (CA) imbalances, while keeping focus on the CA norm (corrected for past excesses) rather than closing the gap between headline and excess-adjusted NFA. - Key modeling assumption displayed in figures: Assumes 6 percent nominal growth and coefficient on NFA = 0.031. - Three-country simulation characteristics (referenced): Country A (persistent excess surplus), Country B (persistent excess deficit), Country C (transitory excess). - Visual diagnostics (Figure 1.4.1 and Figure 1.4.2): Headline vs Excess-Adjusted NFA shown in percent of GDP (vertical scale from −60 to 60 in Figure 1.4.1); CA gaps shown in percent of GDP (vertical scale from −4 to 4 in Figure 1.4.2). ### Key choices and trade-offs - Anchor year and memory of the adjustment: - Longer horizon: Captures more historical excess imbalance and addresses the inconsistency more fully, but accumulates more uncertainty around the cumulated norm path. - Short horizon: Limits accumulation of noise but only corrects for more recent CA excesses (see Table 1.6.2 in Online Annex 1.1 referenced). - Empirical note: An earlier anchor year tends to significantly increase the NFA adjustment for persistent excess surplus and deficit economies. - Choice of CA norms: - Using staff-assessed norms: Incorporates richer country-specific judgment but reduces multilateral consistency and evenhanded coverage. - Using EBA norms (with selected adjustors where warranted): Balances coverage, multilateral consistency, and judgment, at the cost of some country-specific staff-assessed adjustments (see Table 1.6.3 in Online Annex 1.1 referenced). - Empirical note: The choice of the CA norms does not materially change the adjusted CA gaps for the majority of ESR economies (see Section 1.6.4 in Online Annex 1.1 referenced). ### Implementation and conclusion - Implementation cost: Limited implementation cost and does not alter the EBA framework. - Focus: External sector assessments continue to focus on the CA norm corrected for past excesses, not on closing the gap between headline and excess-adjusted NFA. - Overall judgment: The adjusted NFA methodology resolves a normative inconsistency that has grown more material over time. *Italicized analytical figures and simulation assumptions are reproduced exactly as presented in the source (e.g., 6 percent nominal growth; coefficient on NFA = 0.031).* --- ### Box 1.5. Scenario Assumptions ### Scenario 1: Continuation of Current Trends - United States - AI-Boom: Additional surge in US business investment. Investment rises 2.5 percent above the reference forecast by 2030 and stays 1 percent higher beyond that. Surge concentrated in computing and infrastructure; import intensity of US investment increases because many AI-related capital goods are sourced from emerging Asia. - Fiscal Expansion: US fiscal deficit increases by 0.5 percent of GDP for five years, driven by higher public spending. Public debt increases by 2.5 percent of GDP in the long term. - China - Weak demand: Investment declines by one percent over 3 years, financed by higher fiscal spending. These incentives result in a gradual loss of productivity in the tradable sector (0.5 percent). - Euro Area - Weak productivity: Starting in 2026, total factor productivity growth in the euro area is 0.1 percentage point lower per year over five years relative to the reference forecast. Investment-specific productivity growth declines by 0.05 percentage point per year over the same period. Productivity growth returns to the level in the reference forecast after 2030, but the effect on productivity is permanent. Private saving rate increases by 1 percentage point by 2030. ### Scenario 2: Simultaneous Adjustment - United States - AI-Boom: (as in the “Continuation of Current Trends” scenario). - Fiscal reform: Government consumption is permanently reduced. The overall fiscal deficit gradually decreases, reaching 1 percent of GDP by the fifth year. Public debt decreases by 25 percent of GDP in the long term. - China - Broad reform: Short-term fiscal expansion of about 0.5 percent of GDP, including higher social spending that elicits a reduction in the saving rate and measures to support residential investment, followed by gradual consolidation. Industrial policy support is cut in half and coupled with efforts to increase business dynamism, boosting productivity. China’s currency adjusts flexibly. - Euro Area - Productivity reform: Corporate financing costs are permanently reduced by 25 basis points driven by EU-level and national-level reforms. Public investment increases with full utilization of the Recovery and Resilience Facility; some member states initially finance higher deficits. From 2030 onward, there is a reallocation of existing spending such that debt ratios gradually return to their level in the reference forecast. ### China Adjustment Case - China: Broad reform (as in the “Simultaneous Adjustment” scenario). - Risk layer: Higher sovereign risk premium in the US—interest rate on government debt temporarily increases by about 25 basis points as investors reduce appetite for US treasuries. ### US Adjustment Case - United States: Fiscal reform (as in the “Simultaneous Adjustment” scenario). - Risk layer: - Tighter global financial conditions: Corporate risk premiums temporarily rise by up to 30 basis points globally as growth prospects weaken. - Effective lower bound in China: Monetary policy is constrained by the effective lower bound on interest rates. --- *Source: Box 1.4 and Box 1.5, Chapter 1, External Sector Report (2026), with figures and tables reproduced exactly as presented in the source content.* ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### CHAPTER 1 EXTERNAL POSITIONS AND POLICIES ### Summary of 2025 Individual Economy Assessments: Overall assessment and policy recommendations - Argentina — Overall 2025 Assessment: Weaker - Policy Recommendations: Implement a more balanced stabilization program with greater emphasis on external stability to proactively rebuild reserves, sustain a gradual disinflation process, and durably access international capital markets. - Australia — Overall 2025 Assessment: Weaker - Policy Recommendations: A gradual medium-term fiscal consolidation could contribute to narrowing the CA deficit. Meaningful progress on the authorities’ structural reforms agenda to boost productivity could strengthen export competitiveness and support medium-term external rebalancing. - Belgium — Overall 2025 Assessment: Substantially weaker - Policy Recommendations: Implement a sustained expenditure-led fiscal consolidation beyond current plans. Fiscal buffers should be rebuilt, and space needs to be created to increase public investment to boost potential growth and support the green transition. Significant pension, social benefit, tax, labor, product-market, and wage-setting reforms are needed to enhance productivity, potential growth, and competitiveness. - Brazil — Overall 2025 Assessment: Moderately weaker - Policy Recommendations: Implement efforts to raise national savings, increasing scope for priority investments. A sustained and more ambitious fiscal consolidation would help increase net public saving. - Canada — Overall 2025 Assessment: Weaker - Policy Recommendations: Strengthen external competitiveness by removing internal trade barriers, enhancing labor productivity, and scaling up investment in R&D. Targeted and temporary fiscal support may be necessary to allow businesses and households to adjust to the new trade landscape. - China — Overall 2025 Assessment: Stronger - Policy Recommendations: Fiscal stimulus focused on boosting consumption by investing in people and facilitating a more efficient property sector adjustment, while scaling back inefficient investment and unwarranted industrial policy support. Further monetary easing accompanied by a strong fiscal and structural package can facilitate reflation and exchange rate flexibility can help absorb external shocks. Structural reforms that durably reduce household savings and boost investment in services would further reduce the CA surplus. - Euro Area — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Deepening the EU Single Market and completing the Banking Union would raise productivity while enhancing resilience through scale and internal diversification. Improving coordination on public goods investment and enacting structural reforms can boost investment and private demand. These measures can help address the identified credit-related policy gap and offset the need for increased public savings in some countries. Delayed fiscal consolidation would support the external balance only temporarily, as it would eventually require a sharper and more disruptive fiscal correction. - France — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Structural reforms to support productivity, boost innovation, and incentivize private investment would help maintain the external position in line with medium-term fundamentals. - Germany — Overall 2025 Assessment: Stronger - Policy Recommendations: Planned policies aimed at promoting investment and diminishing excess saving would support external rebalancing. Structural reforms to ease regulatory constraints on domestic investment could avoid a widening of external imbalances in the longer run due to fiscal adjustment that will be needed to eventually stabilize the debt-to-GDP ratio. Training to enhance employability of older workers could also extend working lives and reduce the need for savings. - Hong Kong SAR — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Implement gradual fiscal consolidation over the medium term to raise public savings to offset stronger private demand and aging-related spending pressures, while addressing gaps in the social safety net. Maintain wage and price flexibility to support real exchange rate adjustment and preserve competitiveness under the currency board arrangement. Continued strong financial supervision, prudent fiscal management, and flexible markets will sustain the credibility of the LERS and its stabilizing role. - India — Overall 2025 Assessment: Moderately stronger - Policy Recommendations: Further reduce import restrictions, especially on intermediate goods, while continuing to improve the business environment to boost private investment and liberalize the FDI regime. These efforts should be complemented by the development of trade infrastructure and continued expansion of trade networks. - Indonesia — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Enhance buffers within the fiscal rule, and implement structural reforms to raise productivity and promote trade including, higher and more efficient infrastructure investment; higher, more efficient and better targeted social spending to foster human capital development and strengthening the social safety net; reducing or eliminating restrictions on inward FDI and external trade, including by moving away from non-tariff barriers; and promoting greater labor market flexibility. - Italy — Overall 2025 Assessment: Moderately weaker - Policy Recommendations: Implement refortms to boost productivity, competitiveness, and potential growth, including reforms that boost the labor force participation of women and youth to further boost economic activity and savings. Simultaneously, strengthening the external position would require an increase in public sector savings, supported by decisive public debt reduction. - Japan — Overall 2025 Assessment: Moderately stronger - Policy Recommendations: Implement structural reforms to reduce labor market duality, improve labor mobility, boost labor force participation, and improve firm dynamism to boost private-sector-led potential growth. Fiscal adjustment, including a medium-term plan to offset rising interest, health, and long-term care costs, is needed to preserve debt sustainability. While fiscal consolidation would push the CA surplus higher, this would be offset by higher investment and a decrease in private savings. - Korea — Overall 2025 Assessment: Stronger - Policy Recommendations: The continuation of soft-landing measures for the financing of real estate, along with structural reforms aimed at facilitating the AI transition would support the recovery of private investment in the near term. Over the medium term, adopting policies to enhance social protection and encourage the orderly deleveraging of household debt would help reduce the need for household life cycle saving and support household consumption while bringing the external position in line with fundamentals. Structural reforms aimed at boosting innovation and diversifying trade destinations and supply chains would help sustain Korea’s export competitiveness and reduce exposure to external shocks. - Malaysia — Overall 2025 Assessment: Moderately stronger - Policy Recommendations: Implement policies to strengthen social safety nets and public health care, including through a reorientation of fiscal spending. Strengthening social safety nets and swiftly implementing structural reforms under the 13th Malaysia Plan would help lower private sector net savings and strengthen domestically driven growth. Structural policies should be implemented to encourage private investment and improve productivity growth. - Mexico — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Structural reforms are critical to boost investment in the medium to long term. In addition to boosting growth, this would offset the effect of needed fiscal consolidation and, thus, help maintain external balance. Priorities include addressing infrastructure and governance gaps, reducing informality, promoting financial deepening, and increasing private sector participation in the energy sector. - The Netherlands — Overall 2025 Assessment: Stronger - Policy Recommendations: Sustained efforts to raise public investment and foster private investment are needed, notably in infrastructure and housing, while easing electricity grid and nitrogen-related growth bottlenecks. The new coalition government’s plans to increase R&D spending, advance the climate transition, and substantially expand residential investment are appropriately aligned with the need to reduce external imbalances. - Poland — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Implement a cumulative fiscal adjustment of at least 4 percent of GDP by 2030, reducing the fiscal deficit from about 7 percent of GDP in 2025 to 3 percent over the medium term. To boost Poland’s structurally low private investment levels, efforts should focus on easing regulatory hurdles to private sector participation and advancing the EU’s Savings and Investment Union. - Russian Federation — Overall 2025 Assessment: Moderately weaker - Policy Recommendations: ... - Saudi Arabia — Overall 2025 Assessment: Moderately weaker - Policy Recommendations: Implement fiscal consolidation, including through enhanced revenue mobilization and energy price reforms, to help raise public saving. Implement the structural reform agenda to diversify the economy, and boost non-oil exports. - Singapore — Overall 2025 Assessment: Substantially stronger - Policy Recommendations: Implement higher public investment to address the structural transformation from a rapidly aging population and a transition to a green and digital economy. This includes spending on health care, green and other physical infrastructures, and human capital, as well as ongoing reforms to strengthen social safety nets, to help reduce external imbalances over the medium and long term by reducing net saving in both the public and private sectors of the economy. - South Africa — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Implement structural reforms supporting competitiveness, jobs, investment, and growth, that focus on addressing energy and logistics bottlenecks (including by promoting private sector participation), as well as on improving the business environment, governance, and the functioning of labor markets. An ambitious fiscal consolidation is needed to stabilize and put debt on a sustained downward path toward a more prudent level, while protecting vulnerable groups. - Spain — Overall 2025 Assessment: Stronger - Policy Recommendations: Sustained fiscal consolidation efforts would rebuild fiscal space and raise public saving, thus increasing the CA and the NIIP. This could be offset by the negative CA impact of the growth-enhancing structural reforms recommended by staff, which include further efforts to complete the single Spanish market (in addition to the single EU market) for goods and services, facilitate firms’ access to financing through domestic initiatives to boost access to equity and support innovation by young firms by redesigning the R&D tax credit and streamlining red tape. - Sweden — Overall 2025 Assessment: Stronger - Policy Recommendations: The expansionary fiscal stance is supportive of the economic recovery and external rebalancing. There is scope to enhance both private and public investment in productivity-enhancing projects, the green transition, and the health sector. Higher domestic absorption would help reduce external imbalances, while enabling Sweden to maintain its high living standards amid demographic challenges, support meeting the country’s ambitious climate goals and scaling up of defense spending. - Switzerland — Overall 2025 Assessment: Broadly in line - Policy Recommendations: Substantial fiscal policy space should be used to support growth if downside risks materialize. A comprehensive medium-term plan is needed to address increasing structural fiscal needs on aging, climate, and defense. Monetary policy should continue to pursue price stability and avoid the risk of inflation settling at a very low or negative level. - Thailand — Overall 2025 Assessment: Stronger - Policy Recommendations: Promote productive investment, further liberalize the services sector, and reduce competition-distorting tax incentives and subsidies to support durable growth, reduce internal imbalances, and facilitate external rebalancing. Fiscal policy should remain prudent given elevated public debt, with spending focused on targeted social transfers and growth-enhancing investment, while revenue-driven medium-term fiscal consolidation would help rebuild fiscal buffers. - Türkiye — Overall 2025 Assessment: Weaker - Policy Recommendations: Strengthen the policy framework to underpin external sustainability going forward. Tighten both the monetary and fiscal policy stance to contain demand, raise savings, bring down inflation, make medium-term growth more sustainable, and help pave the way for lower CA deficits over the medium-term. Collectively, these policies would improve confidence and help sustain capital inflows, which would allow for a welcome accumulation of international reserves. - United Kingdom — Overall 2025 Assessment: Weaker - Policy Recommendations: The fiscal consolidation path will support external rebalancing by containing import growth and reducing interest rates on domestic liabilities, while progress in the net-zero transition should help mitigate risks of further energy-related terms of trade shocks. - United States — Overall 2025 Assessment: Weaker - Policy Recommendations: Implement fiscal consolidation aimed at achieving a general government primary surplus of about 1 percent of GDP to put the debt-to-GDP ratio on a downward path and adjust the external position to the level implied by medium-term fundamentals and desirable policies. ### Key numeric policy targets and fiscal recommendations (preserved verbatim) - Poland: Implement a cumulative fiscal adjustment of at least 4 percent of GDP by 2030. - Poland: Reduce the fiscal deficit from about 7 percent of GDP in 2025 to 3 percent over the medium term. - United States: Achieve a general government primary surplus of about 1 percent of GDP. *Source: IMF, 2025 Individual External Balance Assessments. Note: “...” indicates that data are not available or not applicable. CFM = capital flow management measure; EU = European Union; FDI = foreign direct investment; FX = foreign exchange; MCP = macroprudential measure; R&D = research and development.* --- _Source: https://www.imf.org/-/media/files/publications/esr/2026/english/ch1.pdf_