The World Is ‘Re-Imbalancing’ Again: SocGen

The World Is ‘Re-Imbalancing’ Again: SocGen

“The Chinese and Japanese current account surpluses have fallen noticeably, and the US current account deficit has narrowed too. However, the euro area (EA) has a growing surplus, and several major EM economies and the UK have seen worsening deficits. Rather than global rebalancing, we are experiencing global re-imbalancing,” says a research note on forex strategy from SocGen analyst Alvin T. Tan.

Current accounts and the big picture

Recent shifts in global current account balances reveal an interesting trend.

Current account balances in the US and Europe are on an uptrend, though the US is still to turn the corner into a surplus.

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Current accounts of China and Japan, though still in surplus, have declined sharply in recent years and are a far cry from the levels seen in 2008.


Domestic austerity in Europe

According to SocGen, the upturn in the US current account is primarily on account of reduced energy imports following the boom in domestic production owing to the shale revolution.

“Meanwhile, the euro area has experienced mounting current account surpluses, such that it is currently running the largest current account balance in dollar terms of any single economy,” points out Tan. Unfortunately, the underlying mechanics of these surpluses are really not so comforting.

“The fact that European export volumes have not risen much higher than their pre-2008 peak, while import volumes are noticeably lower, confirms that the current account surpluses are primarily due to domestic austerity rather than external demand,” according to the SocGen note.

Paul Krugman on austerity in the wealthy nations

In a recent op-ed in the NY Times titled ‘Talking Troubled Turkey,’ Paul Krugman’s views strike a similar note: “The real problem is that the world’s wealthy economies — the United States, the euro area, and smaller players, too — have failed to deal with their own underlying weaknesses. Most obviously, faced with a private sector that wants to save too much and invest too little, we have pursued austerity policies that deepen the forces of depression,” he says.

The countries with current account problems

The SocGen report makes the point that the US, Europe, Japan and China are the four giants that have a surplus current account balance on a net basis.

This surplus is counter-balanced by deficits in countries that are mostly emerging economies. “India, Russia, Brazil, Mexico and Indonesia have all experienced deterioration in their current account balances,” as the chart below shows.


One other nation that is on the other side of the divide is the UK, which is also having a record deficit.

It is an economic truth that a country with a current account deficit is particularly vulnerable in times of global economic turmoil.


The implications of burgeoning current accounts are positive for the US dollar as well as the euro, while the UK’s huge deficit will weigh on the pound. China’s deteriorating surplus, and its restructuring will impact commodity driven currencies such as Australia and Brazil.

On the other hand, “the growing EM imbalances mentioned above suggest that EM financial fragility is set to persist in a world of Chinese structural rebalancing and Fed exit from ultra-loose monetary policies,” says the SocGen report.

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