Global saving and investment rates have fallen, current account imbalances are at unprecedented levels, and yet real long-term interest rates in most countries remain low. What’s going on? The September 2005 World Economic Outlook (WEO) argues that important changes in investment and saving patterns have had significant implications for global imbalances and long-term interest rates.
Global saving and investment rates are near historic lows, having dropped to under 22 percent of world GDP in 2004 from around 26 percent in the early 1970s. The recent decline appears to have been driven by global as well as country- and region-specific developments. Easily available credit and rising asset prices have lowered saving in many industrial countries, but fiscal deficits in the United States and aging populations in Japan and Europe have also been major factors. As for investment, rates have fallen noticeably in Japan, the euro area, and some emerging market regions, particularly Asia (excluding China). As a result, the industrial country share of global saving and investment has dropped to 70 percent in 2004 from about 85 percent in 1970.
Saving and investment trends have fueled imbalances
Data: OECD Analytic Database; World Bank, World Development Indicators; and IMF staff calculations.
These trends have had significant implications for current account imbalances across the world. In particular, with saving falling sharply in the United States, its current account deficit (the excess of investment over saving) has reached an unprecedented level—a projected 6.1 percent of GDP, or $760 billion, in 2005. Elsewhere, rising saving in China and oil-producing countries, and weaker investment in Japan and emerging Asia with the exception of China, have resulted in an excess of saving over investment (a current account surplus).
The current constellation of current account imbalances around the world, involving a large and diverse group of countries including many emerging market and oil-producing economies as well as industrial countries (see chart), stands in strong contrast to the mid-1980s, when large current account imbalances were principally concentrated in the United States, Japan, and Europe (mainly Germany). The current episode appears to be a result of a number of country-specific events rather than a single global event.
The other piece of the puzzle—persistently low real interest rates—seems to be largely the result of the unusually low investment rates for this stage of the economic cycle. Investment levels are low despite strong corporate profit growth, mainly because corporations in many countries have continued to strengthen their balance sheets by paying down debt. In emerging Asia, in particular, there is evidence that a number of countries are currently “underinvesting.”
What it all means
Going forward, two important implications of these findings stand out. First, there is no “silver bullet” to address the imbalances of the large and diverse group of countries currently involved. Urgent action needs to be taken on many fronts, notably accelerated fiscal consolidation in the United States, reforms to boost growth in Japan and Europe, and measures to raise investment in Asia (including completing ongoing financial and corporate restructuring) and in oil-exporting countries.
Second, the evolution of investment will be a critical factor in determining the path of long-term interest rates going forward. A revival of global investment would almost certainly send long-term interest rates higher.