IMF warns in its latest 2018 External Sector Report (ESR) that “excess imbalances are increasingly concentrated in advanced economies” that “both deficits and surpluses—pose risks for individual countries, and for the global economy.” Global current account surpluses and deficits “remained relatively unchanged over the past five years” at around 3.25% of global GDP. And 40-50% is concentrated in advanced economies.
Higher-than-desirable current account balances prevail in northern Europe—in countries such as Germany, the Netherlands, and Sweden—as well as in parts of Asia—in economies like China, Korea, and Singapore. Lower-than-desirable balances remain largely concentrated in the United States and the United Kingdom.
IMF also pointed out that “persistence of global imbalances and mounting perceptions of an uneven playing field for trade are fueling protectionist sentiment.” And “these impulses are misguided. It warned that “escalation of protectionist policies would mainly hurt domestic and global growth, without much of an effect on current account imbalances, as this year’s report also finds.”
It urged countries to tackle imbalances together. In particular:
- Countries with lower-than-warranted external current account balances should reduce fiscal deficits and encourage household saving, while monetary normalization proceeds gradually.
- Where current account balances are higher than warranted, the use of fiscal space, if available, may be appropriate to reduce excess surpluses.
- Well-tailored structural policies should play a more prominent role in tackling external imbalances, while boosting domestic potential growth. In general, reforms that encourage investment and discourage excessive saving—through the removal of entry barriers or stronger social safety nets—could support external rebalancing in excess surplus countries, while reforms that improve productivity and workers’ skill base are appropriate in countries with excess external deficits.
Also from the report, the Real effective exchange rate (REER) gap average in “2017” were:
- USD was moderately overvalued by 8-16%, compared with the level
implied by medium-term fundamentals and desirable policies. - EUR REER gap average in 2017 was in the range of -8% to 0% for Eurozone as a whole. But it ranged from undervaluation of 10-20% in Germany to overvaluation of 0-10% in small to mid-sized Eurozone member states.
- GBP was 0-15% overvalued. But it noted the assessment is subject to a greater margin of uncertainty due to trade relationship with the EU.
- JPY REER gap in the range of -13% to 6%. Broadly in line with medium-term fundamentals and desirable policies.
- CHF REER gap average in 2017 was in the range of -5.3% to 2.3%.
- Canada was overvalued by 1-13% relative to medium-term fundamentals and desirable policies.
- AUD overvalued by 0-17%, above the level implied by medium-term fundamentals and desirable policy settings. 1
- China: The REER to be broadly consistent with fundamentals and desirable policies, with the gap being in the range of -13 to +7 percent.
The blog post can be found here.
The full report here.
