By Giovanni Ganelli, Pau Rabanal and Niamh Sheridan
The war in Ukraine and the resulting increase in commodity prices should contribute to further enlargement this year.
The lingering pandemic and Russia’s invasion of Ukraine are inflicting a setback on the global economy. This affects trade, commodity prices and financial flows, all of which alter current account deficits and surpluses.
Global current account balances— the overall size of deficits and surpluses in countries — are widening for a second consecutive year, according to our latest External Sector Report. After years of tightening, the balances widened to 3% of global gross domestic product in 2020, rose further to 3.5% last year and are expected to increase further this year.
Larger current account balances are not necessarily negative in themselves. But global surplus balances – the part not justified by differences in countries’ economic fundamentals, such as demographics, income level and growth potential, and desirable policy settings, using the revised methodology— could fuel trade tensions and protectionist measures. This would be a setback to efforts for greater international economic cooperation and could also increase the risk of disruptive movements of currencies and capital flows.
Effects of the pandemic in 2021
The pandemic has widened global current account balances, and it still has an asymmetrical impact on countries depending, for example, on whether they are exporters or importers of tourism and medical goods.
The pandemic and associated lockdowns have also shifted consumption from services to goods as people have reduced their travel and entertainment. It also widened global balances, with deficit advanced economies increasing their imports of goods from surplus emerging market economies. In 2021, we estimate that this change increased the US deficit by 0.4% of gross domestic product and contributed to a 0.3% increase in China’s surplus GDP.
Surplus economies like China also saw increases due to increased shipments of medical products that were often routed to the United States and other deficit economies. Soaring transport costs have also contributed to widening global balances in 2021.
War and tightening in 2022
Commodity prices are a key driver of external positions, and last year’s rally in oil prices after pandemic lows affected exporters and importers asymmetrically. The February Russian Invasion Ukraine exacerbated soaring prices for energy, food and other commodities, widening global current account balances by increasing the surpluses of commodity exporters.
Tighter monetary policy is driving currency movements, with rising inflation prompting many central banks to accelerate the withdrawal of monetary stimulus. Revised expectations for the pace of monetary tightening in the United States have led to a considerable realignment of currencies this year, contributing to the expected widening of balances.
Capital flows to emerging markets have been disrupted so far in 2022 by heightened war-triggered risk aversion, with further capital outflows amid changing expectations for accelerated monetary tightening in advanced economies. Cumulative outflows from emerging markets were very large, around $50 billion, with a similar magnitude to the March 2020 outflows but at a slower pace.
Our outlook for next year and beyond calls for a steady decline in global current account balances as the effects of the pandemic and war moderate, although this expectation is subject to considerable uncertainty. Global current account balances could continue to widen if fiscal consolidation in countries with current account deficits takes longer than expected. In addition, a stronger dollar could widen the US current account deficit and increase global current account balances.
Other factors that could dig into these balances include a protracted war that keeps commodity prices high for longer, varying degrees of central bank interest rate increases, and greater geopolitical tension causing economic fragmentation, disrupting supply chains and potentially triggering international market reorganization. monetary system.
A more fragmented trading system could increase or decrease global balances, depending on how trading blocs are reconfigured. Either way, however, it would reduce technology transfer and reduce the potential for export-led growth in low-income countries and thus unambiguously erode the welfare gains from globalization.
The war in Ukraine has exacerbated existing trade-offs for policymakers, including between fighting inflation and safeguarding economic recovery and between supporting those affected and rebuilding fiscal buffers. Multilateral cooperation is essential to address the political challenges generated by the pandemic and the war, in particular to address the humanitarian crisis.
Policies to promote external rebalancing differ according to the positions and needs of each economy. For economies with larger-than-expected current account deficits that reflect large budget deficits, such as the United States, it is essential to reduce public deficits by combining higher incomes and lower spending.
Rebalancing is a different proposition for countries with excessive surpluses, such as Germany and the Netherlands, which can be reduced by stepping up reforms that encourage public and private investment and discourage excessive private saving, including by expanding social safety nets in some emerging markets.