Mind the Gap: Narrowing Imbalances, while Maintaining Growth

External imbalances have narrowed, yet pace of global growth remains sluggish

Joint policy actions needed to revive growth, further reduce imbalances

A range of policy reforms will be needed across member countries

The IMF’s Imbalances and Growth, issued as preparation for the G20 Leaders’ Summit in St. Petersburg on September 5-6, highlights the need for stronger joint policy action to revive global economic growth, as imbalances become smaller. The report assesses general trends and individual country situations for nine key economies—China, euro area, France, Germany, India, Japan, Spain, the United Kingdom, and the United States—identified as having relatively large medium-term imbalances on the basis of the G20 guidelines.

The analysis was conducted in the context of the G20 Framework for Strong, Sustainable and Balanced Growth and Mutual Assessment Process (MAP), a biennial exercise launched after the Pittsburgh Summit in 2009 to promote policy cooperation to meet shared growth objectives. The indicators used to evaluate key imbalances are public debt and fiscal deficits; private saving and private debt; and the external position, comprising trade balance, net investment income flows, and transfers.

The report—which covers both external and internal imbalances—updates the 2011 Cannes Summit staff analysis on the root causes of imbalances, their economic implications, and policy remedies in seven G20 economies. That earlier assessment and its lessons have recently been released in a new IMF book, Global Rebalancing: a Roadmap for Economic Recovery.

Lower global imbalances…

The good news: external imbalances have declined substantially since the crisis—for structural reasons, not just cyclical. In fact, the report finds that the imbalances in major G20 economies have decreased more than the 2011 projections. While some temporary factors may have played a part, the staff analysis does not expect the imbalances to go back to pre-crisis levels if key policy commitments are met. Fiscal imbalances among the nine members analyzed are also slowly improving, although public debt remains too high in many economies in the wake of the crisis.

China’s external surplus, for example, has narrowed markedly between 2008-13, from about 10 percent to 2 percent of GDP, reflecting rebalancing toward internal demand (higher investment). The IMF projects more modest surpluses for the country over the medium term. The United States is also seeing its...