Risks Diminish in Economic Imbalances

Risks Diminish in Economic Imbalances
Risks Diminish in Economic Imbalances

Global imbalances in trade and investment flows have shrunk by more than a third since peaking eight years ago and are likely to stay lower in the future, diminishing their threat to the global economy, the International Monetary Fund said on Tuesday.

Much of the reduction is due to lower demand from consumers in economies with current account deficits, creating higher unemployment and lower growth within those countries, the IMF said in a chapter of its flagship “World Economic Outlook” report, Reuters said. And these narrower current account imbalances seem to be here to stay, as the IMF projects that much of the lower demand in richer nations is likely to persist.

But the Fund pointed to some countries, most notably Turkey, Brazil and New Zealand, which could see their current account deficits widen over the next five years, putting their economies at greater risk of a sudden, damaging reversal in capital flows.

In the run-up to the global financial crisis and recession in 2007-09, many investors and governments feared persistent imbalances - particularly between the United States and its chief creditor China - were unsustainable.

Countries with high external deficits, like the United States, were seen courting the risks of sharp and potentially destabilizing capital outflows if investors lost faith in their economies and ability to pay their debts. After the crisis, IMF was charged with playing a greater role in policing the world economy and ensuring imbalances do not build up to dangerous levels.

“The reduction of large flow imbalances has diminished systemic risks to the global economy,” the IMF said, adding that imbalances are now also less concentrated in major economies, such as the United States and creditors like China and Japan.

“So the risks of a sudden reversal (in flows)... are likely to have diminished,” the Fund said.

The IMF said large “surplus” European economies - usually code for Germany - have space to rebalance further and spend more on imports to help euro zone brethren Greece, Ireland, Portugal and Spain, which have struggled to shrink their deficits and combat unemployment.