After the Crisis: Lower Consumption Growth But Narrower Global Imbalances?

IMF Working Papers, January 1, 2010

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The paper estimates consumption dynamics in the G-7 economies, emphasizing the possibility of precautionary behavior in the face of uncertainty.
In the short run, continued income uncertainty will significantly dampen consumption growth.
Consumption in the G-7 economies is unlikely to be the engine that revives global growth.

Precautionary behavior driven by income uncertainty is a central mechanism reducing consumption growth.
Differences in the pace and timing of consumption moderation across G-7 countries matter for global outcomes.
The U.S. experienced a sharper rise in unemployment and, perhaps, more widespread loss of financial wealth than elsewhere in the G-7:
- The relative rise of the U.S. savings rate is helping narrow global imbalances.
- With a likely earlier recovery in the U.S., this narrowing could be short-lived.
Long-term sources of imbalances include:
- Differences in economic and financial volatility.
- Differences in demographic structures.
These long-term differences have been important sources of global imbalances and could soon reassert their prominence.

Short-run: Continued income uncertainty implies weaker consumption-led global growth, reducing the effectiveness of relying on household consumption as the primary engine of recovery.
Medium-run: Country-specific trajectories (especially a faster U.S. recovery) can reverse temporary narrowing of global imbalances.
Long-run: Structural factors—economic/financial volatility and demographics—require policy attention because they can reestablish imbalances even after short-term adjustments.