Advanced economies increasingly to blame for global imbalances

  • Germany overtakes China as largest surplus economy, IMF data show

by: Shawn Donnan in Washington

The International Monetary Fund has warned that advanced economies are increasingly responsible for imbalances in the global economy, with Germany having overtaken China as the world’s leading saver. New data from the fund unveiled on Friday also showed the US has maintained its long-term hold on the largest current-account deficit. While the mismatch between global savings and spending posed less of a threat to the world than it did before the 2008 financial crisis, the IMF said, it also warned that it risked feeding new demands for protectionism The news plays to Donald Trump’s anger at Berlin and the US trade deficit with Europe’s largest economy which he inherited. The Trump administration, which has made reducing the US deficit with the world one of its economic priorities, has applied pressure on the IMF to do more to highlight global imbalances. But the fund on Friday also offered a thinly-veiled rebuke to the Trump administration by publishing the results of an internal exercise showing that imposing tariffs and other trade barriers — as Mr Trump has threatened to do — would do little to address the current-account deficit and hurt both the US and the global economy.

“Protectionist measures should be avoided at all costs,” said Luis Cubeddu, lead author of the IMF’s annual report on global imbalances. “They are unlikely to meaningfully alter imbalances and they are likely to be harmful to domestic growth and global growth.” According to the IMF data, Germany ran a current-account surplus of $289bn, or 8.3 per cent of gross domestic product, in 2016 while China’s fell to $196.4bn, or 1.7 per cent of GDP.

Protectionist measures should be avoided at all costs. They are unlikely to meaningfully alter imbalances and they are likely to be harmful to domestic and global growth

Luis Cubeddu, IMF The US, meanwhile, had a current-account deficit of $451.7bn in 2016, or 2.4 per cent of GDP, almost four times the UK’s deficit, which at $114.5bn was the world’s second-biggest in 2016. The figure for the UK is more than twice the size of the third-largest — the $50.5bn deficit in Canada.

The data point to an increasing concentration of global imbalances in a few important economies and the new risks that this poses. The scale of global imbalances have fallen significantly from the days before the 2008 financial crisis when a global savings glut fed largely by China and other emerging economies led to an influx of capital — and growing current-account deficits — in places such as the US.

While that risk has been reduced with the US deficit cut from a pre-crisis peak of 6 per cent of GDP, the IMF said it was still concerned that the concentration would lead to rising tensions between advanced economies and growing calls within deficit countries for governments to respond with protectionist policies.

The IMF listed that risk as if it lay ahead and said there was still significant uncertainty about the direction of US policies and the UK’s negotiations to leave the EU. But there is little doubt that Mr Trump’s arrival in Washington following a campaign built around suspicions of globalisation and trade has already caused some of this to come true.

Mr Trump and his top advisers have accused Germany of exploiting a weak euro to its trade benefit while threatening to impose tariffs and other restrictions on imports of things such as aluminium and steel from the likes of China, Germany and South Korea.

He has also launched efforts to renegotiate the North American Free Trade Agreement with Canada and Mexico and a separate trade pact with South Korea, with reducing the US deficit with those countries and bringing manufacturing jobs back to the US the primary stated goal.

Rather than impose trade barriers, the IMF said, the US should focus on carefully reducing government debt and doing more to improve its competitiveness and productivity through better education and training programmes. While the IMF’s concerns with the US have grown so too have its calls for Germany to do more to tackle its surplus.

Investing more at home in things such as infrastructure would help boost Germany’s potential growth and address issues such as the lagging productivity that it and many other advanced economies face.

“We do not necessarily see Germany’s surplus as a threat to the global economy,” Mr Cubeddu said. But “reducing that surplus … would have benefits for the global economy”.

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