Global current account imbalances remain a key challenge for the world economy. While, during the crisis, macroeconomic developments have, to some extent, corrected this trend, recent developments indicate that imbalances are widening again and create risks of abrupt adjustments.
Key measures towards reducing these imbalances, while sustaining a robust global expansion, include more market-driven exchange rates and policies to stimulate domestic demand in surplus countries and external demand in deficit countries.
Global imbalances widened again in 2010
During the crisis in 2008 and 2009, , the United States'current account deficit declined in absolute terms and relative to GDP, but recently the deficit has been widening again. This contrasts with developments in surplus countries, most notably China and several other Asian countries and some oil exporting countries in the Middle East.
Reducing global imbalances is a shared responsibility
Resolving global imbalances in an orderly manner requires a gradual shift in global demand from regions with current account deficits to regions with current account surpluses. All major regions have a responsibility to introduce policies that will contribute to an orderly adjustment.
The United States' priority is to increase private and public savings. Stability-oriented macroeconomic policies, in particular sustainable public finances, could make an important contribution in this regard. In East Asia, the challenge is to reduce excess savings. A transition to more domestically generated growth through improved social security systems and financial market development would help to reduce global external imbalances. This would also support East Asia’s longer-term development. As domestic demand accelerates in these countries, their savings (and current account surpluses) will be reduced.
Furthermore, properly aligned currencies will encourage investment in the non-tradable sector and growth of domestic demand more generally. There is, therefore, a case for economies in the Asian region to allow their currencies to appreciate more. More exchange rate flexibility, while not directly addressing the underlying cause of the imbalances, would help to provide a more flexible environment for imbalances to be resolved.
The role of the euro area
The euro area itself, with its balanced current account, is not part of the problem but could be part of the solution. Structural reforms in Europe, as envisaged under the Europe 2020 initiative, will help the rebalancing process to the extent that they boost domestic demand.
Multilateral co-operation to resolve global imbalances
Rebalancing global growth is now the focus of the G20 discussions as the limited progress made so far in the rebalancing of global growth poses a significant downward risk. The G20 is in the process of setting up a mechanism to assess and address the root causes of macro-imbalances and to identify the impediments to adjustment.