Trade tensions and related uncertainties are weighing on global investment and growth, especially in sectors most integrated into global supply chains, according to the International Monetary Fund.
After narrowing sharply in the aftermath of the global financial crisis, overall current account surpluses and deficits reached 3% of world GDP in 2018, declining marginally while rotating toward advanced economies and away from emerging economies in recent years, the IMF’s External Sector Report shows.
The IMF’s multilateral approach suggests that about 35-45% of overall current account surpluses and deficits were deemed excessive in 2018.
Yet the report shows that trade actions and tensions have so far not significantly affected global current account imbalances, as trade has been diverted to other countries with lower or no tariffs. Instead, these trade tensions and related uncertainties are weighing on global investment and growth, especially in sectors most integrated into global supply chains (where production is carried out across multiple countries).
Despite the narrowing of global current account imbalances, stock imbalances have continued to increase, as creditor countries have run surpluses and debtor countries have run deficits for the most part, the IMF says.
At 40% of GDP, stock imbalances have reached a historical peak and are four times larger than in the early 1990s, according to the IMF. Moreover, gross external debt liabilities of sovereigns and corporates have risen sharply in some economies in recent years, supported by benign global financing conditions. This entails financial stability risks not only for borrowers in deficit countries but also savers in surplus countries.
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By GlobalDataRisks from the current configuration of external imbalances are generally contained, the report notes, at least in the near term as current account deficits and debtor positions are largely concentrated in advanced economies that issue reserve currencies.
That said, not everyone is immune, the IMF warns. An intensification of trade or geopolitical tensions – with negative repercussions for global growth and risk appetite – could affect economies that are highly dependent on foreign demand or external financing.
Over the medium term, in the absence of corrective policies to reduce imbalances, trade tensions could become entrenched, the IMF says. Moreover, a further increase in countries’ external debts in key countries could trigger costly disruptive adjustments that could spill over to the rest of the world.
The report suggests both surplus and deficit countries must work together to reduce excess global imbalances in a manner supportive of global growth and stability.
“It is imperative that all countries avoid policies that distort trade,” the report notes. “Recent trade policy actions are weighing on global trade flows, investment and growth, including through confidence effects and the disruption of global supply chains, with no discernible impact on external imbalances thus far.
“Instead, surplus and deficit countries alike should work toward reviving liberalisation efforts and strengthening the rules-based multilateral trading system that has served the global economy well over the past 75 years.”
