The latest monthly trade data came out today, and was worse than expected -- though in my view that indicates expectations have yet to catch up with reality. Exports have been stuck in the $95-96 billion (monthly) range for several months, while higher oil imports combined with continued strong non-oil import growth means that the United States’ monthly import bill keeps on climbing.
If you extrapolate $54-55 billion monthly trade deficits out til the end of the year, the annual trade deficit would be in the $610 billion range. I think that is probably a bit optimistic if oil stays north of $50 a barrel: higher oil prices will lead to some additional widening in the deficit in q4, barring a broad slowdown. So a deficit of $615 billion seems quite likely. That translates into a current account deficit of $670-$680 billion, particularly if the q2 weakness in the income account continues (it should) -- or an 04 current account deficit closer to 6% of GDP than to 5.5% of GDP. UBS has noted that the trade deficit has been 5.6% of GDP over the past three months, a level for the trade deficit that implies a 6% of GDP current account deficit.
This scares me. All other things being equal, this year’s strong global economy should be reducing our trade/ current account deficits. However, as analysts like Steve Roach have emphasized, the currrent global economy relies on the US for demand and China for supply. The widening deficit is one sign that US consumption growth continues to drive the overall global expansion. My $615 billion overall trade deficit forecast for 2004 can be broken into several components. I expect exports to continue to show strong y/y growth (13%), and to rise to $1152 billion -- a reflection of a strong global economy. This is in some ways an optimistic forecast: US exports were strong in q4 of 03, so to continue to show strong y/y growth, q4 04 monthly exports in 04 would need rise from their current level of around $95 billion a month to something more like $98 billion a month. If oil prices stay high, 2004 Oil imports should reach $180 billion, up 39% y/y. 2004 non-oil imports should reach $1588 billion, up 14.5% y/y, so total imports would rise to $1768 billion. Note that the pace of growth in non-oil imports continues to exceed the pace of growth in US exports: the US trade deficit would be growing even without the oil price shock. Exports have to grow 50% faster than imports to prevent the trade deficit from widening, 13% growth in exports and 14.5% growth in imports will not cut it.
Not surprising, various bilateral deficits are also on pace to widen:
The 04 deficit with China is on pace to reach $159-160 billion, an increase of about $35 billion. But China is not the only source of the overall deficit. Other bilateral deficits are also both large and growing. The 04 deficit with NAFTA countries is on track to rise $20 billion to $115 billion -- largely because of a $19 billion deterioration in the trade balance with Canada (presumably driven by higher prices on US energy imports from Canada). The deficit with the Eurozone is likely to grow by about $10 billion, to $85 billion, and the deficit with Japan may widen by $8-9 billion to close to $75 billion. A bilateral deficit per se is not a cause of concern, as a bilateral deficit with one country can be offset with surpluses elsewhere, and in some cases, modest overall deficits make sense. But large bilateral deficits with basically everyone imply an enormous global deficit and rapidly growing external debt, both of which should raise concerns, particularly if the overall external deficit is not the product of a surge in investment.
All in all this reinforces my view that, barring major changes in the oil price or pattern of global growth, the 2005 US external deficit is likely to be quite large -- well above 6% of GDP, and maybe closer to 7%. Scary.