Action on the part of both excess surplus and excess deficit economies would be reinforcing and best for global growth and stability (photo: Larry Williams/Corbis)
MULTILATERAL SURVEILLANCE
The 2015 External Sector Report (ESR), released today, analyzes recent developments and provides updated staff assessments of economies’ external positions, including current account balances, real exchange rates, external balance sheets, capital flows, and international reserves.
The ESR, which covers 28 of the world’s largest economies plus the euro area, comprises two papers:
• An overview paper that emphasizes multilateral issues, showing how individual economies fit into the global picture and the need for policies to reduce global imbalances; and
• A set of individual external assessments, one for each economy.
Speaking with the IMF Survey, IMF First Deputy Managing Director David Lipton discussed the findings of this year’s ESR, noting that the policy agenda to reduce excess imbalances remains unfinished. Steady, appropriate action on the part of both excess surplus and excess deficit economies is needed, he stressed.
IMF Survey: How have global imbalances been evolving, and what progress has there been in reducing excess imbalances?
Lipton: If we look back to the situation of around 2006-08, imbalances today are much reduced. Still, the ESR finds that imbalances overall are still too large. In too many economies, current account surpluses and deficits exceed their staff-assessed norms.
In general, the last few years have seen little progress in reducing such excess imbalances. To be clear, at the level of individual economies, there has been some progress but also some setbacks. For example, the too-large deficit of the United States has narrowed, but that of the United Kingdom and some emerging markets have widened. From a global perspective, such a “rotation” of deficits replaces one problem with another.
What we need to see instead is a matched narrowing of excess imbalances on both sides, with further progress on both excess surpluses and excess deficits.
IMF Survey: How are recent currency movements likely to affect the picture? Are these movements beneficial, or do they exacerbate existing problems?
Lipton: The ESR emphasizes the need to evaluate the recent exchange rate shifts in light of other important recent developments. Much of the sizable currency movements we’ve seen since are natural responses to shifts in commodity prices, especially the plunge in the price of oil, and to divergences among economies in terms of growth, inflation, and monetary policy. The pattern of real effective exchange rate movements generally will help adjustment to the commodity price. Among the major advanced economies, the divergence of their monetary policies and their exchange rates is likely to be beneficial for the global economy as a whole—under the given circumstances—including by directly and indirectly easing global financial conditions at a time of global slack.
The catch is that we’re not satisfied with current circumstances, which include a global recovery that remains subpar. We should see some of the recent currency movements are also reflections of an incomplete and uneven global recovery. More needs to be done to favor recovery, beyond accommodative monetary policy. This ties in to the IMF’s broader message, a call for a wide range of pro-growth policy actions, with many countries playing their respective parts, to avoid settling into mediocrity or worse.
Coming back to current accounts, these certainly will be affected by recent movements in the real effective exchange rates. The ESR emphasizes that they will also be affected by the drop in the price of oil and other commodities, and by differences in countries’ domestic demand growth.
Even with those effects happening, we project that the broad cross-country pattern of current accounts this year will turn out to be similar to last year’s. That’s because the underlying drivers of that pattern will mostly remain in place. Where there are excess imbalances, policy action will be needed to address those drivers.
IMF Survey: Looking at individual economy assessments, where are the major challenges?
Lipton: The ESR looks at 28 economies plus the euro area, which together represent the bulk of the global economy. For some of those, we find current accounts and exchange rates to be about right. But for many others we find “gaps,” of varying sizes. For each such economy, there is a country-specific challenge to be addressed, calling for various policy actions; these are set out in the ESR paper on individual economy assessments.
But countries’ current accounts are also interrelated, with each economy affecting others and being affected by others. That interrelationship comes out in the ESR’s overview paper. Each economy contributes to the global picture, but the larger economies tend to contribute more than others. So it remains true, for example, that the economies of China and the U.S. are among the most relevant for the global pattern of imbalances and excess imbalances—even though their own imbalances are much reduced from pre-crisis levels.
But those two very large economies are far from dominating the global picture, and others have important roles to play. These include Germany and Korea, in addition to China, on the surplus side. And on the deficit side, you have the United Kingdom, Brazil, and France, in addition to the United States. The ESR also identifies a number of economies for which current account adjustment would be desirable, at least for a country’s own welfare, even if they are not of systemic importance.
So the major challenge is not located in only one place but really is a multilateral one. The challenge is for steady, appropriate action on the part of both excess surplus and excess deficit economies. Action on both sides would be reinforcing, and best for global growth and stability.
IMF Survey: Indeed, the report calls for action from countries with excess surpluses as well as those with excess deficits. What steps are needed, and what are the risks of inaction?
Lipton: Again, the needed steps vary case by case. In general terms, there’s a need for policies that would boost domestic demand in excess surplus economies and growth of such demand in excess deficit economies. In some cases, fiscal policy may be part of that demand adjustment effort, but structural policies that would affect the saving and investment rates of the private sector are also needed. Adjustment of real exchange rates, though it would not suffice on its own, is also essential, and policies should facilitate rather than obstruct that adjustment.
The risks of inaction—or of unbalanced action—are several. At best, inaction on excess imbalances would mean a lost opportunity, settling for a mediocre global outcome in terms of growth and stability. Insufficient action to reduce excess deficits would mean additional risks to financial stability. Action only on the side of excess deficits, without action on the side of excess surpluses, would mean a global reduction in demand, and so be globally contractionary at a time when the world as a whole needs more demand.
IMF Survey: What do you see as the role of the External Sector Report, now in its fourth year?
Lipton: The External Sector Report has become a key part of the IMF’s surveillance. It integrates multilateral and country-specific perspectives.
Behind the two ESR papers prepared each year, there is an ongoing process of interaction among Fund staff to be sure that both perspectives inform each other. The process also ensures that economies are assessed in an evenhanded manner, and that the individual economy assessments “add up” to a coherent, multilaterally consistent picture.
In that way, the ESR process supports, but does not replace, the IMF’s regular assessments of its member countries’ economies.
