London, August 3 (HNA) – Global current account balances are set to widen even further in 2021 but this trend is not expected to last, according to the latest IMF staff forecasts, which indicate that global current account balances will narrow in the coming years, as China’s surplus and the US’ deficit falls, reaching 2.5 percent of world GDP by 2026.
“2020 was a year of extremes. Travel all but ceased for a period. Oil prices wildly fluctuated. Trade-in medical products reached new heights. Household spending shifted to consumer goods rather than services and savings ballooned as people stayed home amid a global shutdown” reminded Martin Kaufman and Daniel Leigh, from the IMF.
Exceptional policy support prevented a global economic depression, even as the pandemic took a heavy toll on lives and livelihoods. The global reaction, as seen in major shifts in travel, consumption, and trade, also made the world a more economically imbalanced place as reflected in current account balances—a record of a country’s transactions with the rest of the world.
“In our latest External Sector Report, we found that the global reaction to the pandemic further widened global current account balances—the sum of absolute deficits and surpluses among all countries—from 2.8 percent of world GDP in 2019 to 3.2 percent of GDP in 2020. Those balances are set to widen further as the pandemic continues to rage in much of the world” read the blog, adding that:
“If not for the crisis, global current account balances would have continued to decline. While external deficits and surpluses are not necessarily a cause for concern, excessive imbalances—larger than warranted by the economy’s fundamentals and appropriate economic policies—can have destabilizing effects on economies by fueling trade tensions and increasing the likelihood of disruptive asset price adjustments.”
Exceptional policy support prevented a global economic depression, even as the pandemic took a heavy toll on lives and livelihoods. The global reaction, as seen in major shifts in travel, consumption, and trade, also made the world a more economically imbalanced place as reflected in current account balances—a record of a country’s transactions with the rest of the world.
“In our latest External Sector Report, we found that the global reaction to the pandemic further widened global current account balances—the sum of absolute deficits and surpluses among all countries—from 2.8 percent of world GDP in 2019 to 3.2 percent of GDP in 2020. Those balances are set to widen further as the pandemic continues to rage in much of the world” read the IMF blog, and went on as follows:
“If not for the crisis, global current account balances would have continued to decline. While external deficits and surpluses are not necessarily a cause for concern, excessive imbalances—larger than warranted by the economy’s fundamentals and appropriate economic policies—can have destabilizing effects on economies by fueling trade tensions and increasing the likelihood of disruptive asset price adjustments.
“Ending the pandemic for everyone in the world is the only way to ensure a global economic recovery that prevents further divergence. This will require a global effort to help countries secure financing for vaccinations and maintain healthcare.
“A synchronized global investment push or a synchronized health spending push to end the pandemic and support the recovery could have large effects on world growth without raising global balances.
“Governments should step up efforts to resolve trade and technology tensions and modernize international taxation. A top priority should be the phasing out of tariff and non-tariff barriers, especially on medical products.
“Countries with excess current account deficits should, where appropriate, seek to reduce budget deficits over the medium term and make competitiveness-raising reforms, including in education and innovation policies. In economies with excess current account surpluses and remaining fiscal space, policies should support the recovery and medium-term growth, including through greater public investment.
“In the years to come, countries will need to simultaneously rebalance, while ensuring that the recovery is built on a solid and durable foundation.”