Global Rebalancing: The Key Challenge in 2015

By most of the available measures, the US current account balance is improving on the back of the country’s lower oil imports and some modest growth in exports, particularly within the aerospace sector. More significantly, we also find that the Eurozone’s aggregate current account balance has itself improved very significantly over the last few years, in part as a result of the widespread weakness in the economies of the periphery but also as a result of the change that occurred in the behaviour of German savers following the 2012 “rescue” of the Euro system.

It is now clear that German savers reacted to the European Central Bank’s attempted rescue of the Euro by significantly increasing their acquisitions of foreign financial assets, with the result that Germany began to run an overall balance of payments deficit, something that is not supposed to occur (for very long) when a country is operating within the awkward confines of a fixed exchange rate regime, such as the Euro. The German economy’s rather stereotypically efficient response to this deficit was to attempt to export more and even to limit its imports by suppressing domestic demand in Germany. While this was clearly not something that the ECB had wanted to occur (in fact, it wanted to see the reverse), it was something that has contributed significantly to the reported “improvement” in Europe’s aggregate current account balance.

Crucially, we find that this improvement within Europe’s current account position, when coupled with the more modest improvement within the US’s current account position, has implied that their combined annual current account balance (that is, that of the “West”) has improved by some USD800 billion since 2008 and USD300 billion since 2012 alone, to the point at which the West is now running its first “surpluses” for more than a generation.

For those of us that joined the economics profession/financial markets either during or soon after the mid-1980s, this change in what we might refer to as the West’s current account position is perhaps a seminal event. Ever since the early 1980s, we have grown used to Western consumers importing more than their countries were exporting, a situation that provided an explicit boost to the trading nations of the world and to the emerging markets.