Recent trade tensions between the U.S., Europe and China have dominated the economic newsflow of late and spurred an intense debate about global trade. As intensifying trade tensions pose a significant risk to economic relationships and the global economy itself, it is important to examine global current account balances. In this report, we focus on the main global economies in terms of GDP: the U.S., Japan, China and Germany.
While it is true that excessive imbalances can pose a risk, it is not true that deficits are always a negative sign. To the contrary, they can be a force for good for a country’s economy, typically when young, fast-growing economies are in need of investment in order to grow. Such economies access external
resources by importing more than exporting and borrowing to cover implied deficits.
On the other hand, developed economies with ageing populations hold savings in order to finance retirement payments. As a consequence, if they lend to countries with deficits, that can, together with trade flows, cause current account surpluses.
Nevertheless, countries running current account deficits and therefore incurring debts need to invest the money in order to increase their productivity and output so that they can service their debts. Much like private households, using debt for consumption and living beyond one’s means is, other things being equal, not sustainable for any economy in the long run.
Examining the current account balance provides a comprehensive and detailed overview of global trade links and their underlying causes.
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