How the Pandemic Widened Global Current Account Balances

IMF Blog, August 2, 2021

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Global current account balances—the sum of absolute deficits and surpluses among all countries—rose from 2.8 percent of world GDP in 2019 to 3.2 percent of GDP in 2020.
Global current account balances are set to widen even further in 2021 but are projected to narrow to 2.5 percent of world GDP by 2026 according to IMF staff forecasts.
Despite the shock of the crisis, excessive current account deficits and surpluses were broadly unchanged in 2020, representing about 1.2 percent of world GDP.
If not for the crisis, global current account balances would have continued to decline.

Travel declined:
- Sharp decrease in tourism and travel reduced account balances of tourism-dependent countries such as Spain, Thailand, Turkey, and had larger consequences for smaller tourism-dependent economies.
Oil demand collapsed:
- Collapse in oil demand and energy prices led oil-exporting economies, such as Saudi Arabia and Russia, to see current account balances decline sharply in 2020.
- Oil-importing countries saw corresponding increases to their oil trade balances.
Medical products trade boomed:
- Demand surged by about 30 percent for medical supplies critical for fighting the pandemic, such as personal protective equipment, and for the inputs and materials to make them.
Household consumption shifted:
- Households shifted consumption away from services toward consumer goods, especially in advanced economies, with increased purchases of durable goods like electrical appliances used to accommodate teleworking and virtual learning.

Exceptional policy support prevented a global economic depression and made it easier for countries to finance wider current account deficits through favorable global financial conditions and unprecedented monetary policy support from major central banks.
In past crises with sharply tightened financial conditions, running current account deficits was harder, pushing countries further into recession.
The pandemic spurred massive government borrowing to finance health care and provide economic support to households and firms, creating large uneven effects on trade balances.

Projected path: global current account balances narrow to 2.5 percent of world GDP by 2026.
Risks that could delay reduction in balances:
- Large deficit economies like the US undertaking additional fiscal expansions.
- Faster-than-expected fiscal adjustment in current account surplus countries, like Germany.
- Resurgence of the pandemic and a tightening of global financial conditions that disrupt capital flows to emerging markets and developing economies.

End the pandemic globally:
- Ensure a global effort to help countries secure financing for vaccinations and maintain healthcare; "Ending the pandemic for everyone in the world is the only way to ensure a global economic recovery that prevents further divergence."
Coordinate investment and health spending:
- A synchronized global investment push or a synchronized health spending push to end the pandemic and support the recovery could have large effects on world growth without raising global balances.
Trade and technology policy:
- Step up efforts to resolve trade and technology tensions and modernize international taxation.
- Phase out tariff and non-tariff barriers, especially on medical products, as a top priority.
Fiscal and structural policies by country type:
- Countries with excess current account deficits should, where appropriate, seek to reduce budget deficits over the medium term and make competitiveness-raising reforms, including in education and innovation policies.
- Economies with excess current account surpluses and remaining fiscal space should support the recovery and medium-term growth, including through greater public investment.
Simultaneous objectives:
- In the years to come, countries will need to simultaneously rebalance while ensuring that the recovery is built on a solid and durable foundation.

Source: IMF blog post “How the Pandemic Widened Global Current Account Balances” by Martin Kaufman and Daniel Leigh, August 2, 2021.