2018 External Sector Report: Tackling Global Imbalances amid Rising Trade Tensions
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- Published: July 19, 2018
Highlights and Key Findings
- Global current account balances stand at about 3¼ percent of global GDP.
- Of this, 40-50 percent are deemed excessive, meaning some countries are saving too much and others are borrowing too much.
- Global imbalances have remained broadly unchanged in recent years but have become increasingly concentrated in advanced economies.
- Excess surpluses have been especially large and persistent in a small group of countries: Germany and China (most prominently), and to a lesser extent 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).
- About 40-50 percent of last year’s global current account balances were not explained by countries’ fundamentals and desirable polices.
Risks to Global Stability and Scenarios
- Large and sustained excess external imbalances in key economies—combined with 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,
- a larger US current account deficit.
- Near-term risks:
- Aggravation of trade tensions.
- Faster tightening of global financing conditions that could be especially disruptive for emerging market economies with weak external positions.
- Medium-term risks:
- Sustained deficits could lead to widening debtor positions in key economies, constraining global growth and possibly resulting in sharp and disruptive currency and asset price adjustments.
- Region-specific risks:
- Asymmetries in competitiveness among euro area members, if unaddressed, pose risks to the currency block and the global economy.
- Persistent unbalanced domestic demand in China could result in an abrupt growth slowdown and a resurgence of its excess external imbalances.
Policy Guidance and Recommendations
- With limited policy space and normalizing cyclical conditions, policies need careful sequencing and calibration to achieve domestic and external objectives.
- For countries with weaker-than-warranted external positions and full employment:
- Priority should be given to actions that strengthen public and private sector balance sheets.
- Monetary normalization should proceed gradually.
- For economies with stronger-than-warranted external positions and fiscal space:
- A less-restrictive fiscal stance would help promote external rebalancing.
- Euro area-specific recommendations:
- Accommodative monetary conditions remain necessary to support the return of area-wide inflation to its target.
- Further banking, fiscal, and capital markets integration would help boost investment and reduce the currency area’s excess external imbalance.
- Structural policy priorities as cyclical policies are unwound and policy space is rebuilt:
- In excess surplus countries: reforms that encourage investment and discourage excessive saving (for example, through reduced entry barriers and stronger social safety nets).
- In excess deficit countries: reforms that reduce labor costs and improve competitiveness.
- Trade policy recommendation:
- Protectionist policies should be avoided because they are likely to have significant deleterious effects on domestic and global growth, while having limited impact on external imbalances.
- Surplus and deficit countries 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.
Report Structure
- 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
2018 External Sector Report: Tackling Global Imbalances amid Rising Trade Tensions — July 2018
Content in this bundle
- 2018 External Sector Report: Individual Economy Assessments; July 2018
- The Acting Chair’s Summing Up
- Technicalsupp
- Full Report
References
- The External Balance Assessment Methodology: 2018 Update
- Blog: Addressing Global Imbalances Requires Cooperation by Maurice Obstfeld
- External Sector Reports Archive
- What are global imbalances and why are they important?
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