Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: 'Encouraging Signs' on Global Imbalances

October 17, 2007

  • First IMF multilateral consultation provides roadmap to help mitigate risk
  • China's current account surplus remains on rising trajectory
  • Dollar depreciation picks up following financial turmoil, but is orderly

Global imbalances remain large, although there are some encouraging signs of moderation, IMF Chief Economist Simon Johnson told a briefing.

'Encouraging Signs' on Global Imbalances

In oil exporters, current account surpluses should narrow as these countries ramp up spending (photo: David Mdzinarishvili/Reuters)


The IMF released October 17 the full text of the IMF's World Economic Outlook (WEO) at a press briefing in Washington ahead of the IMF-World Bank Annual Meetings.

Johnson said the IMF's first multilateral consultation—involving China, Saudi Arabia, Japan, the euro area and the United States—provided a joint roadmap for policies to help mitigate global risks, while supporting global growth. But he stressed the need to follow through on plans arising from the consultation for the global economy to remain in good health.

Among the encouraging signs and other trends on global imbalances, Johnson noted that

The U.S. current account deficit is moderating to around 5 ½ percent ot GDP—benefiting from past dollar depreciation and a more balanced pattern of global demand growth. The latest U.S. trade numbers had also been encouraging. Some recovery in U.S. household saving was expected, and fiscal balances had improved, although long-run pressures on public finances remained a concern.

In oil exporters, current account surpluses should narrow as these countries ramp up spending. However, with the weakening dollar and rising oil prices in recent weeks, the reduction may be less than projected earlier.

China's current account surplus remains on a rising trajectory. Renminbi flexibility against the U.S. dollar has increased, and domestic inflation has led to some small appreciation in real effective terms, but the burgeoning surplus is showing no sign of slowing.

Japan's current account surplus also remains large with no immediate prospect that this will narrow significantly in the near term.

Dollar depreciation has picked up since the recent financial turmoil began, but it has so far been orderly. Johnson noted that the the dollar has depreciated noticeably against a wide range of currencies since August, but less so against the currencies of key surplus countries. A close watch was needed, he said, for risks associated with either a disorderly adjustment or an asymmetric adjustment or both.

Shared responsibility

The United States, China, the euro area, Japan, and Saudi Arabia all agreed to participate in the first round of multilateral consultations. Some of these economies were direct parties to the imbalances, through current account deficits or surpluses, and some represented large shares of global output. The IMF invited them to participate because those five economies could, as a group, play a major role in both helping reduce the imbalances and sustaining world growth at the same time.

The consultations began with discussions between IMF staff and each participant, followed by three meetings involving all five participants. The last of these meetings took place in March 2007. In mid-April—just ahead of the meetings of the IMFC—the five countries and the IMF issued a joint report.

In the report, the five countries stressed that reducing global imbalances is a multilateral challenge and a shared responsibility, and that an orderly unwinding of imbalances would benefit all countries in the world. They reaffirmed their commitment to the strategy that had been set out by the IMFC a year earlier and agreed to publish detailed statements of their policy intentions.