Analyze This! Global Imbalances

[0:00]What are global imbalances? We're not talking about cosmic forces here. We're talking about financial imbalances between countries. Think of the world as a small village with just a couple of hundred inhabitants. These people are buying and selling goods and services to each other, like shoes and haircuts. Some of these people buy more than they sell. They have to borrow to make up the difference. These folks are said to have a current account deficit. Other people are selling more stuff than they buy. They have a current account surplus. They're saving a lot, and they are also the ones lending to people who have current account deficits. The same concept applies to countries. Current account deficits aren't necessarily a bad thing. Both deficits and surpluses can be appropriate and indeed healthy. Young, fast-growing economies may need to invest in order to grow, so they often run deficits in the sense that they import more than they export. Rich, aging countries may need to save more to prepare for when workers retire, so they run surpluses. They export more than they import. So why worry about imbalances? There are times when deficits and surpluses can be excessive, meaning that some countries are saving too much and others are borrowing too much. Such a situation may become unsustainable and put the global economy at risk. For instance, excess imbalances may aggravate trade tensions. And they can make deficit countries vulnerable to sudden reversals of capital flows when lenders get nervous and pull out their money. That's why the IMF tracks how countries are handling their surpluses and deficits. Our annual External Sector Report provides the IMF's view whether external balances are appropriate or excessive. In our latest assessment, we find that about half of the global current account balances, amounting to about 1 and 1/2% of world GDP, are now deemed excessive. And while global imbalances remain broadly unchanged in recent years, they have become increasingly concentrated in advanced economies. From a global perspective, excess surpluses have been especially large and persistent in a small group of countries, most prominently in Germany and China, and to a lesser extent in Korea, the Netherlands, Sweden, and Singapore. Excess deficits remain mainly in the United States and the United Kingdom. So what can be done? All countries need to work together to reduce imbalances. Surplus countries should continue to consume more, for example, by ramping up infrastructure investment at home, while deficit countries should save more, including by reducing how much the government borrows. And all countries should work together toward a level playing field for trade. A well-balanced global economy is a win for everyone.