GLOBAL IMBALANCES: PRE- AND POST-CRISIS GIAN MARIA MILESI-FERRETTI International Monetary Fund Research Department The views expressed are those of the authors and not necessarily those of the IMF or its Executive Board
Plan of talk A look back pre-crisis What we worried about What we missed The post-crisis adjustment Do pre-crisis imbalances help understand postcrisis outcomes? Are external imbalances still a systemic problem?
Background Pre-crisis period: rapid expansion of current account imbalances during 2000-2007 Period generally characterized by very easy external financing conditions, rising asset prices, housing and credit booms in a number of countries IMF worried a lot about global imbalances, and a potential disorderly adjustment Multilateral consultation on global imbalances (2006) Systematic assessments of exchange rate misalignment and current account gaps
A small detour into misalignment estimates pre-crisis US: dollar overvalued, excess CA deficit China: RMB undervalued, excess CA surplus Japan: Yen undervalued, excess CA surplus Euro Area: no major misalignment or excess CA in the aggregate Other excess surpluses: emerging/advanced Asia Other excess deficits: CEE
Global CA imbalances pre-crisis 3.0 Global current account imbalances (percent of world GDP) 2.0 1.0 0.0-1.0-2.0-3.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Advanced Europe China Advanced Asia Oil exporters United States Euro Area debtors CEE+ Other debtors
Global stock imbalances precrisis 20 Global IIP (percent of world GDP) 15 10 5 0-5 -10-15 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 EUR creditors China Advanced Asia Oil US EUR debtors CEE Other debtors
The crisis However, the crisis took a different form Clear ex post that imbalances were a symptom of pre-crisis excesses Indeed, the bonanza ended abruptly with the crisis tighter external financing conditions, reassessment of external credit risk for many borrowers
Key questions What happened to global imbalances? How did CA adjustment take place? What was the role of exchange rate adjustment? Are excess CA imbalances pre-crisis a useful metric to understand post-crisis developments?
The decline in global CA imbalances 3.0 Global current account imbalances (percent of GDP) 2.0 1.0 0.0-1.0-2.0-3.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Advanced Europe China Advanced Asia Oil exporters United States Euro Area debtors CEE+ Other debtors
The distribution of CA balances postcrisis Number of medium/large countries with large CA deficits (>5% of GDP) shrunk dramatically post-crisis. This happened for surpluses too, to a lesser extent 2005-08 2015-17 Countries with CA/GDP<-5% 85 70 Weight in world GDP 28% 5% Countries with CA/GDP>5% 42 22 Weight in world GDP 20% 10%
but stock imbalances still expanding 25 20 15 10 5 0-5 -10-15 -20-25 Global IIP (percent of world GDP) 2000 2002 2004 2006 2008 2010 2012 2014 2016 EUR creditors China Advanced Asia Oil US EUR debtors CEE Other debtors
What happened? Much weaker domestic demand in deficit countries
What happened? Better performance of domestic demand in surplus countries 140 135 130 125 Current Spring 2007 WEO Selected European creditor countries: Total Domestic Demand, 2004-14 290 270 250 230 Current Spring 2007 WEO China: Total Domestic Demand, 2004-14 120 210 115 190 110 170 105 150 100 130 95 110 90 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 90 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
What happened? Real exchange rate (deficit)
What happened? Real exchange rate (surplus)
Bottom line Sharp reduction in global imbalances Large compression in GDP and domestic demand in deficit areas, relative to pre-crisis forecasts Some real exchange rate adjustment (but much smaller than ex ante assessments) What lessons for CA adjustment? Overestimation of growth prospects in deficit countries?
Very strong correlation between pre-crisis gap and subsequent CA adjustment
demand growth 2008-13 Pre-crisis CA gap and demand growth post-crisis Growth in total domestic demand, 2008-13 and current account gap, 2005-08 -0.02-0.04 y = 0.34x + 0.02 R² = 0.32-0.06-0.08-20% -15% -10% -5% 0% 5% 10% 15% 20% Current account gap 2005-08 0.12 0.10 0.08 0.06 0.04 0.02 0.00
Was the correlation of post-crisis demand with the CA gap reversed later? No. Pre-crisis gap still very strongly correlated with demand growth post-crisis (2008-17). Correlation dominated by the first 5 years.
Global imbalances going forward Pro-cyclical boost to demand in the US coming from fiscal stimulus (taxes + spending) CA balance projected to temporarily worsen (albeit not as mush as during the pre-crisis years) USD implications? Valuation channel? IIP changes going forward (as a ratio of domestic GDP) larger for creditors
Projected change in the IIP to GDP ratio, 2017-23 IIP dynamics 25 20 15 10 5 Net IIP (in percent of GDP): 2017 and projected changes 2017-23 0-5 -10-15 -100-50 0 50 100 150 Net IIP 2017 (in percent of domestic GDP)
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