The advent of deflationary forces and the slamming of brakes on global growth is being blamed on global current-account imbalances which is being claimed to be back.

And an effective, international policy response to the problem is likely to be a long way off, laments HSBC Holdings Plc which drew the above conclusion in a report published earlier this week.

According to Janet Henry, the bank’s global chief economist, last year represented an inflection point for the global economy. With the surpluses of Germany, China, and Japan – the world’s three largest surplus nations — increasing both in dollar and GDP-share terms, current-account imbalances have started to widen once more after moderating slightly after the financial crisis. HSBC calculates that this year global imbalances will be close to 2007’s record highs by the former metric.

“Excess savings from surplus economies were widely blamed for the misallocation of resources that ultimately led to the global financial crisis. So the fact that global imbalances are growing again should be ringing alarm bells,” Henry writes.

With a deficit-ridden U.S. consuming the excess production of China, which runs a surplus, just as Germany’s export of its savings to peripheral Europe are held to have triggered a credit boom there, this school of thought sees the financial crisis as having, at root, to do with unsustainable current-account positions.

Henry points out that it’s not just deficit nations that suffer even as countries that operate large current-account deficits have been vocal in complaint. The value of creditor nations’ savings is threatened by excess savings which depress global output as a whole, she says echoing what John Maynard Keynes dubbed the paradox of thrift.

In a world rife with these imbalances, China’s large-scale investments in low-yielding U.S. Treasuries are symptomatic of the low returns on offer is the most notable case today, she says.

“These savers could not only face low returns and capital losses on their massive investments overseas; they also risk locking in low growth now that the export engine is running slow. If they do not deliver stronger growth in domestic demand then global growth is likely to stay weak and the deflationary influence they exert on the rest of the world will persist.“

Henry is not even close to being the first to bemoan the situation. While Peking University Professor Michael Pettis and Nomura Research Ltd.’s Richard Koo have long called for action to address China and Japan’s surpluses, respectively, last year, former Federal Reserve Chair Ben Bernanke wrote that, “Germany’s trade surplus is a problem”. Henry isn’t optimistic on the potential for these imbalances to be remedied in the near future despite repeated warnings from these luminaries.

The key is finding a way to increase demand in all the three nations. To push businesses to invest in Japan, the country should embark on more aggressive measures, HSBC argues. Exceeding its own constitutional requirement to run a balanced budget, this will be the third consecutive year Germany has run a budget surplus.

In part through supply-side measures, and by liberalizing its capital-account, China wants to boost the relative share of domestic consumption in its economic output as it  wants to engineer a jump in household income. But Beijing’s bid to stabilize the credit cycle conflicts this medium-term rebalancing goal.

(Adapted from Bloomberg)

Categories: Economy & Finance