External Sector Report

HIGHLIGHTS The IMF’s 2018 ESR shows that global current account balances stand at about 3¼ percent of global GDP. Of this, 40-50 percent are now deemed excessive, i.e. some countries are saving too much, and others are borrowing too much. And while global imbalances remain broadly unchanged in recent years, they have become increasingly concentrated in advanced economies. From a global perspective, excess surpluses have been especially large and persistent in a small group of countries, most prominently in Germany and China, and to a lesser extent, in Korea, Netherlands, Sweden and Singapore. Excess deficits remain mainly in the United States and the United Kingdom, some euro area debtor countries, and a few vulnerable emerging market and developing economies (e.g. Argentina, Turkey). This finding matters because persistent excess imbalances may become unsustainable, putting the global economy at risk and aggravating trade tensions. They can also make deficit countries vulnerable to sudden reversals of capital flows, when lenders get nervous and pull out their money.

REPORT

Section 1. External Sector Report 2018 (full report)
Section 2. Individual Economy Assessments
Section 3. Refinements to the External Balance Assessment Methodology—Technical Supplement 
The Acting Chair’s Summing Up on the 2018 External Sector Report

KEY POINTS

Overall global current account surpluses and deficits remained broadly unchanged, at about 3¼ percent of world GDP in 2017, with growing concentration in advanced economies. About 40-50 percent of last year’s global current account balances were deemed excessive (that is, not explained by countries’ fundamentals and desirable polices). Higher-than-desirable balances prevailed in the euro area (driven by Germany and the Netherlands), other advanced economies (Korea, Singapore, Sweden), and China, with their contributions to excess global imbalances depending both on the size of their economies and their own imbalances. Lower-than-desirable balances remained concentrated in the United States, the United Kingdom, some euro area debtor countries, and a few vulnerable emerging market economies (Argentina, Turkey).

Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability. The fiscal easing currently underway in the United States is leading to a tightening in monetary conditions, a stronger US dollar, and a larger US current account deficit. In the near term, these trends risk aggravating trade tensions, and the resulting faster tightening of global financing conditions, which could prove even more disruptive for emerging market economies, especially those with weak external positions. Over the medium term, sustained deficits, leading to widening debtor positions in key economies, could constrain global growth and possibly result in sharp and disruptive currency and asset price adjustments. Meanwhile, asymmetries in competitiveness among euro area members, if unaddressed, pose risks to the currency block and the global economy; while persistent unbalanced domestic demand in China could result in an abrupt growth slowdown and a resurgence of its excess external imbalances.

With limited policy space and normalizing cyclical conditions, policies need to be carefully sequenced and calibrated to achieve domestic and external objectives. In countries with weaker than-warranted external positions and full employment, actions to strengthen public and private sector balance sheets should take priority, while monetary normalization proceeds gradually. In economies with stronger-than-warranted external positions and fiscal space, a less-restrictive fiscal stance would help promote external rebalancing. In the euro area, where accommodative monetary conditions remain necessary to support the return of area-wide inflation to its target, further banking, fiscal, and capital markets integration would also help to boost investment and reduce the currency area’s excess external imbalance. As cyclical policies are unwound gradually and policy space is rebuilt, well-tailored structural policies will need to play a more prominent role in tackling excess global imbalances. In general, reforms that encourage investment and discourage excessive saving (for example, through reduced entry barriers and stronger social safety nets) are necessary in excess surplus countries, while focus on reforms that reduce labor costs and improve competitiveness are more appropriate in excess deficit countries.

Finally, protectionist policies should be avoided as they are likely to have significant deleterious effects on domestic and global growth, while limited impact on external imbalances. Surplus and deficit countries alike should work toward reviving liberalization efforts and strengthening the multilateral trading system—particularly to promote trade in services, where gains from trade are substantial but barriers remain high.