Global payments imbalances—the large U.S. current account deficit, which reached 6.4 percent of GDP in 2005, and the corresponding surpluses, mainly of oil-producing countries, a number of Asian economies, and some advanced economies—are at the heart of the current global economic policy debate. As recent issues of the IMF’s World Economic Outlook (WEO) have underscored, the continuing large U.S. current account deficit increases the risks of a disorderly downward adjustment in the U.S. dollar, which would, in turn, sharply push up U.S. interest rates and possibly lead to a global slowdown and even recession.
A related issue is the possible interaction between these persistent global imbalances and increases in international oil prices. Chapter II of the April 2006 WEO examines the extent to which the sharp increase in international oil prices over the past few years may have exacerbated global imbalances and, looking ahead, how higher oil prices might affect the resolution of these imbalances.
The WEO analysis argues that higher oil prices have indeed widened global external payments imbalances. In particular, higher oil prices account directly for one-half of the deterioration in the U.S. current account (a contribution equivalent to about 1 percentage point of U.S. GDP) over the past two years. Data suggest that the oil-exporting countries have so far been relatively cautious about increasing spending in line with their increased revenues. As a result, they are now running current account surpluses amounting to 15 percent of GDP or higher.
Oil is having an impact through other channels as well. There is some evidence that the recycling of petrodollars through international capital markets is helping to keep long-term interest rates low in the United States, further fueling the current account deficit through domestic demand. International capital inflows have depressed yields in the United States by perhaps ¾ of 1 percentage point. The precise effect of petrodollars on financing conditions is difficult to isolate, but there is evidence that some of these capital inflows are indeed oil-related.
What may lie ahead
The WEO analysis suggests that, in the future, current accounts may adjust more slowly to the oil price shock than they have in the past. In previous oil price shocks, oil-importing countries saw higher energy prices lead to increases in inflation and interest rates, slower growth of domestic demand, and declines in exchange rates and asset prices, resulting in relatively fast current account adjustment. This time—in part because many countries have strengthened their monetary frameworks and improved central bank credibility—the impact on the real side of the world economy has been smaller. These developments, coupled with deeper financial integration and subdued spending to date in oil-exporting countries, suggest that current accounts may now adjust more slowly.
Widening external imbalances
Rising oil prices are worsening already large global imbalances.
Data: IMF, World Economic Outlook, April 2006.
Nevertheless, the WEO study argues, policies can play an important role in speeding up the adjustment process and reducing the risks that the global imbalances will be resolved through a disorderly adjustment. For oil-importing countries, it will be important to allow a full pass-through of world oil prices to domestic energy prices to reduce oil consumption, accompanied by monetary policy that guards against any increase in core inflation. For producers, most of which are developing countries, it will be highly desirable—both from a domestic perspective and to help reduce global imbalances—to take measures to boost expenditures in areas where returns are high. It will also be vital to pursue structural reforms to boost domestic supply, particularly of nontradable goods.
Alessandro Rebucci and Nikola Spatafora
IMF Research Department
World Economic Outlook, April 2006
The full text of chapters II, III, and IV of the April 2006 World Economic Outlook is available on the IMF’s website (www.imf.org). Published copies of the full World Economic Outlook will be available on April 19. Copies are $49.00 ($46.00 academic rate) each from IMF Publication Services. Please see page 112 for ordering information.