Global macroeconomic imbalances are regarded as one of the causes of the 2007– 09 economic and financial crisis. While some countries – foremost China – exported more than they imported for years, accumulated enormous currency reserves and invested their capital largely in the United States, other countries – first and foremost the United States – found themselves running large current account deficits and major foreign debt.
When a country imports more than it exports, it can be said to be living beyond its means. Consumption exceeds production. In technical terms, this is associated with the country saving less than it invests. In a sense, the country lives from other countries’ products, and at the same time runs up debts with them. The effect of savings deficits associated with export deficits is then seen in the capital account. One country’s export surplus is another country’s debt.
Germany Exports Much More Than it Imports
For years the German current account has been demonstrating the opposite phenomenon. Germany exports much more than it imports – and debt to Germany accrues globally to exactly that extent. Such imbalances are not automatically problematic. Through its export surpluses Germany could be said to be accumulating “savings” in the world. Coming generations will be glad of that, especially when Germany’s population is shrinking and ageing. But such macroeconomic imbalances become dangerous when they proliferate on a global scale. The higher the global debt mountains grow, the greater the risk of debtors being unable to make their payments. And the risk of investment bubbles increases. In the lead-up to the financial and economic crisis, U.S. capital account surpluses (associated with deficits in the U.S. trade balance) led to inflation in the property market. The capital generated by export surpluses in countries like China thus found its way into the global economy. Excessive current account surpluses and deficits can both create global economic uncertainties, whose repercussions may also be felt in Germany.
Global imbalances falling since the crisis
Annual current account surplus as percentage of GDP
Since the financial crisis, coordinated action by the strongest global economies has succeeded in containing the imbalances and risks. China’s current account surpluses were rising strongly until the outbreak of the global economic and financial crisis. Since then they have remained positive, but increasingly tending towards equilibrium. Conversely, the U.S. deficit grew until the start of the crisis. Since then its current account has similarly trended towards normalisation, this time from the negative side.
The Current Account of Greece Points to the Risks
The risks associated with macroeconomic imbalances become particularly clear when one considers the Greek current account. Concerted action by the EU, ECB, and IMF significantly reduced the annual deficit (2007: 14 percent of GDP) and thus meaningfully reduced the macroeconomic risk. Altogether the EU achieves a slightly positive current account. The surpluses of the South American emerging economies Argentina and Brazil, on the other hand, have withered in recent years and fallen into the red.
The latest IMF report on global financial stability highlights the macroeconomic imbalances of the emerging economies and the proliferation of contagion risks to the global economy. Not only has the emerging economies’ share of global GDP grown to an impressive 38 percent, but trade between emerging economies and developed countries has intensified and the integration of the global financial markets has advanced apace since the millennium. One consequence is that emerging economies now account for about one-third of stock market volatility in the developed countries. Global share prices fell ten percent after the Chinese stock market turbulence of 6 January 2016. Although they have largely recovered since, volatility remains high.
Debt is Central to the Problem of Macroeconomic Imbalances
Debt is central to the problem of macroeconomic imbalances. The corporate debt ratio in emerging economies has almost doubled over the past ten years, from 55 percent to more than 100 percent of GDP, while profitability has fallen. During the same period, return on equity in the emerging economies fell from 18 percent to 8.5 percent – and continues to fall. The repayment of many loans now appears to be questionable. Rising debt and falling yields indicate the misallocation of capital and resources in many emerging economies. Prolonged and painful restructuring processes can be expected, with effects on global trade flows.
Halved in a few years: Return on equity in emerging economies
Return on equity in emerging economies (percent)
Doubled in a few years: Corporate debt in emerging economies
Corporate debt in emerging economies (percentage of GDP)
These global imbalances increase the risks for German industry, especially for global operators. German export growth has slowed. The development of new growth markets and the intensification of existing trade relations through new trade agreements plays an important role here.