At the request of the G20, the IMF provides technical analysis to evaluate key imbalances (photo: Roma Yandolin/Demotix/Corbis)
G20 LEADERS’ SUMMIT
The IMF’s Imbalances and Growth, issued as preparation for the G20 Leaders’ Summit in St. Petersburg on September 5-6, highlights the need for stronger joint policy action to revive global economic growth, as imbalances become smaller. The report assesses general trends and individual country situations for nine key economies—China, euro area, France, Germany, India, Japan, Spain, the United Kingdom, and the United States—identified as having relatively large medium-term imbalances on the basis of the G20 guidelines.
The analysis was conducted in the context of the G20 Framework for Strong, Sustainable and Balanced Growth and Mutual Assessment Process (MAP), a biennial exercise launched after the Pittsburgh Summit in 2009 to promote policy cooperation to meet shared growth objectives. The indicators used to evaluate key imbalances are public debt and fiscal deficits; private saving and private debt; and the external position, comprising trade balance, net investment income flows, and transfers.
The report—which covers both external and internal imbalances—updates the 2011 Cannes Summit staff analysis on the root causes of imbalances, their economic implications, and policy remedies in seven G20 economies. That earlier assessment and its lessons have recently been released in a new IMF book, Global Rebalancing: a Roadmap for Economic Recovery.
Lower global imbalances…
The good news: external imbalances have declined substantially since the crisis—for structural reasons, not just cyclical. In fact, the report finds that the imbalances in major G20 economies have decreased more than the 2011 projections. While some temporary factors may have played a part, the staff analysis does not expect the imbalances to go back to pre-crisis levels if key policy commitments are met. Fiscal imbalances among the nine members analyzed are also slowly improving, although public debt remains too high in many economies in the wake of the crisis.
China’s external surplus, for example, has narrowed markedly between 2008-13, from about 10 percent to 2 percent of GDP, reflecting rebalancing toward internal demand (higher investment). The IMF projects more modest surpluses for the country over the medium term. The United States is also seeing its external and fiscal deficits decreasing from their peaks and they are expected to remain smaller over the medium term.
The IMF analysis also recognizes that most of the adjustment—large declines in investment, increases in private saving, and higher government spending to cushion the fall in demand —occurred during the so-called “Great Recession” of 2009. Part of the adjustment was also healthy in that it corrected a lot of the financial excess that preceded the crisis in 2007-8.
…but lackluster global growth
The not-so-good news: real GDP growth has been rather disappointing. The outlook for advanced economies is marked down further below earlier trends, given the lasting effects of the crisis. Some of the narrowing of global imbalances has been driven by demand compression in deficit economies, which has hurt growth. For example, U.S. private saving-investment balances adjusted sharply in the wake of market-led corrections, including the housing bust and tighter bank credit.
Part of the problem, according to the IMF analysis, is that in general, policy adjustment has played only a small role in reducing global imbalances thus far.
“Before the crisis, the global economy has shown the ability to expand rapidly when imbalances were widening and large, and, with the crisis and its aftermath, to grow much more slowly when imbalances were narrower. It has yet to pull off stronger growth with smaller imbalances. Staff’s analysis offers a policy roadmap to achieve that,” noted Hamid Faruqee, Division Chief in the IMF’s Research Department and one of the lead authors of the report.
Policy roadmap for rebalancing
The report concludes that policy adjustments are needed along two broad dimensions. First, there is a need for further internal rebalancing.
Improving public finances in countries with persistently large budget deficits will help narrow their external deficits too. The authorities in the United States and Japan should strive for substantial consolidation at a measured pace, anchored with credible fiscal roadmaps. In the United Kingdom, policymakers will need to adjust, while also striking the right balance between concerns about debt sustainability and growth. In India, where external pressures have recently heightened, the authorities will need to address underlying deficits through fundamental tax and subsidy reform, as well as structural improvements to the economy.
Second, there is a need for further external rebalancing, with policies tailored for key surplus and deficit economies.
On the surplus side, countries will need to carry out structural reforms to durably strengthen internal demand (Germany) or modify its composition (China). In deficit economies, policymakers should focus on structural reforms designed to improve external competiveness. These include product market reforms (Spain, France), services sector liberalization (France, Germany), improving worker skills and banking sector competition (United Kingdom), and removing supply bottlenecks to strengthen exports (India). Further exchange rate adjustment—as discussed in the 2013 Pilot External Sector Report—would also facilitate rebalancing.
