Transcript of IMF Press Briefing on the Release of 2017 External Sector Report

IMF News, July 28, 2017

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The External Sector Report (ESR) is part of the IMF’s strengthened multilateral surveillance, launched in 2012 to provide a globally-consistent assessment of external positions.
The 2017 ESR brings together individual assessments of 29 economies, representing about 85 percent of global GDP.
Methodological upgrades include the External Balance Approach (EBA) replacing the CGER, improved disentangling of policy contributions (for example, fiscal policy or FX intervention) and a better role for fundamentals such as demographics.
The report assesses deviations of surpluses and deficits from desirable levels (referred to as “excess” imbalances) and analyzes the policy gaps—deviations of actual policies from desirable policies.

Global imbalances have narrowed significantly from pre-global financial crisis peaks, but progress has stalled in recent years and imbalances remain large from a historical perspective.
About one-third of total surpluses and deficits globally are deemed to be excessive (i.e., deviations from desirable levels).
Since 2013 the magnitude of excess imbalances has remained largely unchanged, but their composition has shifted:
- Excess imbalances have become increasingly concentrated in advanced economies.
- Excess surpluses narrowed in several key emerging economies (led by China) and excess deficits narrowed in countries including Brazil, Indonesia, South Africa, and Turkey.
- These improvements in emerging markets were accompanied by growth in excess imbalances in advanced economies and continued large and persistent excess surpluses in other countries.
In some cases (notably China) real exchange rate and current account assessments can diverge; paragraph 14 of the report is cited for details on such discrepancies.
The U.S. dollar experienced notable appreciation from 2013 through 2016, followed by volatility around the U.S. election; recent strength has been moderated by reassessed policy expectations and gradual policy interest rate increases.

The current constellation—persistence of excess surpluses in a group of countries and resurgence of deficits in key debtor economies—suggests weak automatic adjustment mechanisms (prices, saving and investment decisions are not adjusting sufficiently).
Contributing factors to weak adjustment include rigid currency arrangements and structural features such as inadequate safety nets and barriers to investment and demand.
Near-term financing risks may be reduced by the concentration of deficits in fewer countries (for example, the U.S. and the U.K.), but medium-term downside risks remain if excess imbalances are unaddressed.
Potential adverse outcomes include:
- Increased likelihood of protectionist measures and associated negative effects on domestic and global growth.
- Risk of disruptive corrections over the medium term as gaps between creditor and debtor positions widen (concerns highlighted with reference to Figure 13 and projected NIIP trajectories).
The report views these stock imbalances as a medium-term concern that warrants policy action to prevent a larger deterioration in international investment positions.

General prescription: both deficit and surplus economies need to act collectively to ensure rebalancing that supports global growth and stability.
For countries with deficits above desired levels:
- Move forward with fiscal consolidation.
- Gradually normalize monetary policy in tandem with inflation developments.
- Implement structural policies to improve competitiveness and boost savings.
For countries with surpluses above desired levels and fiscal space:
- Reduce reliance on easy monetary policy.
- Allow for greater fiscal stimulus to support domestic demand and investment.
For countries where monetary policy is constrained (for example, some individual euro area economies):
- Use fiscal and structural policies to facilitate relative price adjustments.
Across all countries:
- Emphasize country-specific structural policies to lift distortions that constrain domestic demand, investment, and trade competition.
- Avoid protectionist policies; boxes 6 and 8 of the report highlight that protectionism is unlikely to meaningfully address external imbalances and would be extremely harmful for domestic and global growth (box 8 page 25; table 5 page 46 referenced for further examples).
- Reduce trade barriers—including non-tariff barriers and barriers affecting services—to bolster trade integration, productivity, and growth.

United States:
- The U.S. was identified as having an excess deficit; policy advice includes gradual fiscal consolidation and structural reforms to boost competitiveness and savings.
- Revisions to near-term U.S. growth reflect changes in policy expectations; medium-term growth broadly unchanged relative to earlier assessments.
- Large fiscal stimulus in deficit countries could strengthen the U.S. dollar, tighten global monetary conditions, and pose spillover risks to emerging markets.
China:
- Recent renminbi moves and reduced reserve losses do not change the ESR assessment that China’s real exchange rate is broadly in line with fundamentals.
- The report anticipates a narrowing of China’s current account surplus as reforms shift the economy away from credit- and investment-led growth toward consumption.
Japan:
- Monetary conditions should remain accommodative while Japan pursues gradual fiscal consolidation given a fairly negative output gap; monetary policy should normalize only gradually.
Germany:
- Part of Germany’s surplus is judged to be excessive; reducing this excessive surplus via domestic policies (boosting investment, productivity, and demand) would be in Germany’s own domestic interest and provide positive spillovers globally.

The ESR is presented as a key global public good that provides a multilateral assessment and a blueprint for collective policy action, leveraging the IMF’s near-universal membership and macroeconomic expertise.
The ESR focuses attention on policy gaps and structural distortions as primary drivers of excess global imbalances and is intended to sharpen discussion on the policies needed to reduce those imbalances in a growth-friendly manner.

Source: Transcript of IMF Press Briefing on the Release of 2017 External Sector Report, July 28, 2017.