Global Current Account Balances Widen Amid War and Pandemic

IMF Blog, August 4, 2022

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Global current account balances widened to 3 percent of global gross domestic product in 2020.
Balances grew further to 3.5 percent last year.
Balances are expected to expand again this year.
Larger current account balances are not necessarily negative on their own, but global excess balances (the portion not justified by differences in countries’ economic fundamentals using the Fund’s revised methodology) could fuel trade tensions, protectionist measures, and disruptive currency and capital flow movements.

The pandemic widened global current account balances and had asymmetric impacts depending on countries’ exposure as exporters or importers of tourism and medical goods.
Shift in consumption from services to goods (less travel and entertainment) widened global balances:
- This shift increased the United States deficit by 0.4 percent of gross domestic product in 2021.
- This shift contributed to an increase of 0.3 percent of GDP in China’s surplus in 2021.
Greater shipments of medical goods to deficit economies and surging transportation costs also contributed to widening global balances in 2021.

Commodity prices, particularly the post-pandemic rally in oil and the surge after Russia’s February invasion of Ukraine, widened global current account balances by raising surpluses for commodity exporters.
Monetary policy tightening and revised expectations about the pace of US monetary tightening brought about sizable currency realignment this year, contributing to projected widening of balances.
Capital flows to emerging markets were disrupted by increased risk aversion triggered by the war and changing expectations about monetary tightening:
- Cumulative outflows from emerging markets have been about $50 billion, with a magnitude similar to outflows during March 2020 but a slower pace.

Baseline: Outlook for next year and beyond is for a steady decline of global current account balances as pandemic and war impacts moderate, though this is subject to considerable uncertainty.
Scenarios that could continue to widen global current account balances:
- Fiscal consolidation in current account deficit countries taking longer than expected.
- A stronger dollar widening the US current account deficit.
- A prolonged war keeping commodity prices elevated for longer.
- Varying degrees of central bank interest-rate increases.
- Greater geopolitical tension causing economic fragmentation, disrupting supply chains, and potentially triggering a reorganization of the international monetary system.
A more fragmented trade system could either increase or decrease global balances depending on trade bloc reconfiguration, but would reduce technology transfers, decrease the potential for export-led growth in low-income countries, and unambiguously erode welfare gains from globalization.

Multilateral cooperation is key to addressing policy challenges from the pandemic and the war, including tackling the humanitarian crisis.
Policies to promote external rebalancing should be tailored to individual economies’ positions and needs:
- For economies with larger-than-warranted current account deficits reflecting large fiscal shortfalls (for example, the United States): reduce government deficits with a combination of higher revenue and lower spending.
- For countries with excessive surpluses (for example, Germany and the Netherlands): reduce surpluses by intensifying reforms that encourage public and private investment and discourage excessive private saving, including by expanding social safety nets in some emerging markets.

Global Current Account Balances Widen Amid War and Pandemic — Giovanni Ganelli, Pau Rabanal, Niamh Sheridan, August 4, 2022.

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