Warning- imbalances worsen
Warning: global economic imbalances are getting worse. The US trade deficit rose to a new record $61bn (£32bn) in February. This was not supposed to happen.
Global imbalances were expected to narrow as the economic cycle matured. Instead they are increasing. The International Monetary Fund is worried that this trend will continue, increasing the risk of a sudden adjustment at some point in the future.
The economic argument is familiar. The US current account deficit is not sustainable in the long run. If private investors lose faith that a gradual adjustment is feasible, or foreign central banks stop accumulating US assets, the dollar could fall sharply. This would probably prompt a similarly abrupt rise in US interest rates, which could kill off the US housing and consumption boom and explode over- leveraged financial institutions, with severe global consequences.
Two months ago Alan Greenspan suggested that market forces appeared “poised to stabilise and, over the long run, possibly to decrease” the US current account deficit. The IMF believes the current account deficit will indeed stabilise but at an unsustainable level: about 5.7 per cent of gross domestic product in 2005 and 2006, unless the dollar falls further.
The immediate culprit is the widening growth differential between the US (and China and the UK) on the one hand, and the eurozone and Japan on the other. The US has powered ahead. But growth faltered in the eurozone and Japan. The IMF now expects the eurozone to grow at only 1.6 per cent and Japan at 0.8 per cent this year. It wisely urges the European Central Bank and the Bank of Japan not to jeopardise this – though, bizarrely, it still thinks Japan should raise taxes.
Policymakers have shirked their responsibilities to tackle the underlying causes of the imbalances. The US is not doing nearly enough to reduce government borrowing; the eurozone is moving too slowly with growth-promoting labour market reforms; Japan still has its own structural problems to overcome; and Asia as a whole is resisting currency appreciation.
Global imbalances were expected to narrow as the economic cycle matured. Instead they are increasing. The International Monetary Fund is worried that this trend will continue, increasing the risk of a sudden adjustment at some point in the future.
The economic argument is familiar. The US current account deficit is not sustainable in the long run. If private investors lose faith that a gradual adjustment is feasible, or foreign central banks stop accumulating US assets, the dollar could fall sharply. This would probably prompt a similarly abrupt rise in US interest rates, which could kill off the US housing and consumption boom and explode over- leveraged financial institutions, with severe global consequences.
Two months ago Alan Greenspan suggested that market forces appeared “poised to stabilise and, over the long run, possibly to decrease” the US current account deficit. The IMF believes the current account deficit will indeed stabilise but at an unsustainable level: about 5.7 per cent of gross domestic product in 2005 and 2006, unless the dollar falls further.
The immediate culprit is the widening growth differential between the US (and China and the UK) on the one hand, and the eurozone and Japan on the other. The US has powered ahead. But growth faltered in the eurozone and Japan. The IMF now expects the eurozone to grow at only 1.6 per cent and Japan at 0.8 per cent this year. It wisely urges the European Central Bank and the Bank of Japan not to jeopardise this – though, bizarrely, it still thinks Japan should raise taxes.
Policymakers have shirked their responsibilities to tackle the underlying causes of the imbalances. The US is not doing nearly enough to reduce government borrowing; the eurozone is moving too slowly with growth-promoting labour market reforms; Japan still has its own structural problems to overcome; and Asia as a whole is resisting currency appreciation.
April 15, 2005
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