EXECUTIVE SUMMARY
A
fter narrowing sharply in the aftermath of need to adopt or continue with growth-friendly fiscal
the global financial crisis, overall current consolidation, while excess surplus economies should
account surpluses and deficits reached 3 per- deploy available fiscal space to boost potential growth
cent of world GDP in 2018, declining mar- and achieve rebalancing (Germany, Korea, Nether-
ginally while rotating toward advanced economies in lands), including by boosting public infrastructure
recent years. The IMF’s multilateral approach suggests investment, and avoid overreliance on monetary policy
that about 35–45 percent of overall current account where applicable. Structural policies remain central
surpluses and deficits were deemed excessive in 2018. to tackle external imbalances, but they need to be
Higher-than-warranted balances remained centered in carefully sequenced and tailored. In general, excess
the euro area as a whole (driven by Germany and the surplus countries should adopt reforms that encourage
Netherlands) and in other advanced economies (Korea, investment and discourage excessive saving, includ-
Singapore), while lower-than-warranted balances ing by supporting innovation and deregulating certain
remained concentrated in the United Kingdom, the sectors (Germany, Korea), widening the coverage of
United States, and some emerging market economies social safety nets (Korea, Malaysia, Thailand), and
(Argentina, Indonesia). China’s external position was addressing rising and high corporate saving. Excess
assessed to be in line with fundamentals and desirable deficit countries should increase labor market flexibility
policies, as its current account surplus narrowed further, and improve competitiveness, including by strength-
although achieving a lasting external rebalancing will ening the skill base of workers (Canada, Indonesia,
require gradual reining in expansionary macroeconomic South Africa, Spain, United Kingdom, United States).
policies and adopting further structural reforms. In the euro area, where accommodative monetary
Meanwhile, net creditor positions have continued to conditions remain necessary to support the return of
increase and, at about 20 percent of global GDP, are area-wide inflation to its objective, higher wage growth
at a historical peak—four times the level prevailing in in key creditor economies is necessary for rebalanc-
the early 1990s, with net debtor positions reaching a ing. Even in some economies where external positions
similar magnitude. Short-term financing risks from the are assessed to be broadly in line with fundamentals,
current configuration of external imbalances are gener- actions are necessary to tackle domestic imbalances and
ally contained, as debtor positions are concentrated prevent a resurgence of external imbalances through
in reserve-currency-issuing advanced economies. An targeted structural reforms, including by reducing bar-
intensification of trade tensions or a disorderly Brexit riers to investment and competition in certain sectors
outcome—with further repercussions for global growth (China, Japan).
and risk aversion—could, however, affect other econo- Exchange rate flexibility remains key to facilitate
mies that are highly dependent on foreign demand and external adjustment, with limited evidence of this
external financing. Over the medium term, in absence mechanism weakening over time. As highlighted in
of corrective policies, trade tensions could become Chapter 2, varying features of international trade,
entrenched, and further divergence of external stock including dominant currency invoicing and global
positions could trigger costly disruptive adjustments in value chain integration, can alter the mechanisms of
key debtor economies that could spill over to the rest external adjustment in the short term, while conven-
of the world. tional exchange rate effects on trade flows remain at
With output near potential in most systemic econo- play in the medium term. Sluggish near-term export
mies, a well-calibrated macroeconomic and structural responses in some cases—in part reflecting these fea-
policy mix is necessary to support rebalancing. Excess tures of international trade—suggest that exchange rate
deficit countries (United Kingdom, United States) flexibility may need to be supported with other policies
International Monetary Fund | July 2019 ix
2019 EXTERNAL SECTOR REPORT
in some cases, including to lessen capacity constraints on global trade flows, investment and growth, includ-
through improved access to credit and transportation ing through confidence effects and the disruption
infrastructure, to facilitate external rebalancing. Other of global supply chains, with no discernible impact
country-specific features, including reliance on foreign on external imbalances thus far. Instead, surplus and
currency borrowing, need to be considered when deficit countries alike should work toward reviving
designing the overall policy response. liberalization efforts and strengthening the rules-based
It is imperative that all countries avoid policies that multilateral trading system that has served the global
distort trade. Recent trade policy actions are weighing economy well over the past 75 years.
x International Monetary Fund | July 2019