BackTrade balances improve, but borrower countries more indebted now
The large net foreign liability position of many countries shows continued systemic risk
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The world’s trade imbalances have improved over the past seven years, shows data from the International Monetary Fund’s World Economic Outlook. Chart shows that they have reduced by one-third over this period.
The IMF report says that this improvement had little to do with exchange rate movements. It was primarily owing to a reduction in demand and at the cost of rising internal imbalances such as high unemployment and large output gaps (the difference between actual output and potential output).
Does this mean that the imbalances will again grow wider when growth rebounds? The IMF treats that question with caution. It notes that in many countries potential output has decreased. That means even without expenditure switching (consuming more goods locally rather than imports in case of deficit countries and vice-versa for surplus nations), there is a chance that this narrowing of imbalances is permanent. But it also warns that the impairment to potential output is not very clear for some large euro zone nations.
However, these changes to trade balances have not led to a similar improvement in international investment position of countries. The net foreign liabilities of borrower economies has increased both in absolute terms and as a proportion of world output. That’s because trade balances have only narrowed and not reversed. Large debtor economies thus remain vulnerable to changes in market sentiment and hence represent continued possible systemic risks, the IMF said.
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