New External Assessments Reveal a Mixed Picture

Overall external imbalances are down—but remain too large

Recent progress mixed: some imbalances narrowing, others growing

Surplus and deficit economies should act to reduce excess imbalances

The 2014 Pilot External Sector Report (ESR), the third annual exercise of its type, analyzes recent developments and provides updated staff assessments of economies’ external positions—including current account balances, real exchange rates, external balance sheets, capital flows and international reserves.

Covering 28 of the world’s largest economies plus the euro area, the ESR comprises two papers:

• An overview paper emphasizes multilateral aspects and issues, showing how the individual economies fit into the global picture, and the need for policies to reduce global imbalances.

• A set of individual external assessment write-ups, one for each economy. These assessments, which emphasize the impact of policies, draw in part on estimates from the recently-developed Pilot External Balance Assessment methodology.

The essence of the ESR exercise is the combination of multilateral and individual economy perspectives, according to Steve Phillips, who chaired the inter-departmental group that produced the report. “Since any economy’s external position—its current account balance, its balance sheet, its exchange rate—is the counterpart of all other economies’ positions, it can’t be assessed in isolation,” says Phillips. “The ESR exercise, including the preparation of these two papers, is how the Fund staff work together to produce a coherent picture.”

New patterns of imbalances

This year’s report points to some good news but also to some less satisfactory developments.

The most positive note comes from looking at global imbalances—that is, the sums of the current accounts of all economies with surpluses, and of all those with deficits. Such imbalances today are much below their all-time peak recorded in 2006. And, while progress in reducing imbalances seemed to stall in 2011 and 2012, imbalances overall came down in 2013.

But the report finds that global imbalances remained too high in 2013, identifying what it calls “excess imbalances.” Economies are not expected to have balanced, nor constant, current accounts; the staff assessments are with respect to norms that allow for the effects of country-specific fundamentals, appropriate policies, and temporary influences. Even after such allowances, external imbalances overall are about double what the...