Here are three that jumped out at me.
A savings glut not an investment drought.
Global savings is estimated to be close to 23.6% of world GDP in 2007, up from around 21% in the 2001-2003 – and above the 22% average between 1993-2000. Investment is up to, but with real rates low globally, the rise in investment likely reflects a rise in savings – i.e. a glut that has driven real rates down.
Certainly there is a “glut” of savings in developing Asia – a group that includes China. Savings is estimated to be 45% of developing Asia’s GDP – up 12% from its 1993-2000 average. Investment is up too – at 38% of GDP in 2007, it is estimated to be about 5% higher than its 1993-2000 average. But even with higher investment, developing Asia is in a position to lend a lot more to the rest of the world – 7% of its GDP in 2007, v. next to nothing from 1993-2000. I tend to side more with Dr. Wolf than Dr. Roubini on this question. I don’t think the US deficit is entirely the product of US policies (the US has brought it fiscal deficit down from its 2004 peak, though it is once again starting to rise). It also has has been induced by the rise in China’s surplus. Indeed, right now the rise in China’s surplus seems to be inducing deficits in Europe as well as the US.
There is also a savings glut in the Middle East. Savings, at an estimated 44% of GDP in 2007 – is up about 20% from its 1993-2000 average. Investment is up about 4%, not nearly enough to offset the rise in savings. The dynamics here aren’t hard to understand. Oil has soared. Domestic spending and investment are growing rapidly – but not as fast as oil is rising. Here I think the US should be looking a bit more in the mirror. The US cannot do anything – apart from imposing countervailing tariffs – to get China to stop pegging to the dollar, or to adopt policies that would lower its national savings rate. But the US certainly could adopt policies to reduce the United States call on global oil supplies. The US remains a very energy-inefficient economy.
State-led financial globalization
Take a look at Table A13. The IMF estimates the emerging world will add $1085b to its reserves in 2007, and there will be an additional $132b in net official outflows (this mostly comes from a $112 outflow from the Gulf – think sovereign wealth funds). That works out to a $1.2 trillion increase in official assets.
That increase is far larger than the emerging world’s $700b estimated current account surplus. The IMF estimates that net private capital inflows to the emerging world will total about $500b. That total may be a bit high – the August turmoil slowed the pace of capital flows to the emerging world. But there are some signs it has bounced back very strongly. India, for example, is now struggling with huge inflows. Russian reserve growth -- judging from this week's data -- looks to have resumed.
Imbalances are usually defined in terms of the current account. The US runs a big current account deficit, the emerging world and Japan a big current account surplus.
But they equally could be defined in capital account terms.
Right now, there is an enormous gap between net private capital flows and the US deficit, creating a large “financing gap” that is filled by official inflows.
And, on the other side, the emerging world is now attracting net private inflows on the scale that the US needs even though it is running, in aggregate, a $700b surplus.
IMF data makes it absolutely clear that the uphill flow of capital is not a private flow.
Europe joins Bretton Woods 2
Dooley, Garber and Folkerts-Landau initially argued that Asian reserve growth would finance the US current account deficit.
That story – when augmented with a story about rising oil savings and the investment of the oil surplus in (offshore) dollar assets – describes the world from 2001 to 2005 rather well. The US deficit rose from $385b to $755b (an increase of $370b). That increase offset a $127b increase in developing Asia’s surplus and a $263b increase in the surplus of the oil exporters.
But as the dollar-RMB depreciated against Europe and oil-exporters started buying more European assets, the system evolved. China started to run large bilateral surpluses with Europe. And if 1/3 of the $1.2 trillion increase in official assets is invested in Europe, Europe is now receiving a $400b capital inflow from emerging market central banks and oil funds. That inflow seems to have induced a swing in Europe’s current account balance –
This swing doesn’t show up in the data for the Eurozone as clearly as it shows up in the data for the European Union as a whole. That makes sense. Eurozone banks take the inflow from Asia and the oil states and lend it to Eastern Europe. But the overall result is clear: the IMF now forecasts that the rise in the emerging world’s surplus will be offset by a rise in Europe’s deficit.
Between 2005 and 2008, the IMF expects the US deficit to rise by about $30b (from $755b to $785-790b) and the EU’s deficit to rise by $175-180b (from $30b to $215-220b).
Asia's surplus is expected to rise. The IMF expects developing Asia’s surplus to increase $280b from 2005 to 2008, thank to China. The oil surplus only rises by $30b. By 2008, developing Asia has a signficantly larger surplus than the oil exporting economies.
Obviously, though, that forecast depends on the price of oil, as well as the pace of increase in spending and investment in the oil-exporting economies. I personally suspect the IMF underestimated the rise in spending and investment in the Gulf. But they also may have underestimated the price of oil. $90 a barrel even as the US slows is amazing.
All in all, though, the IMF's balance of payments forecast makes sense. Asian currencies are very, very weak relative to European currencies. And Europe is unquestionably attracting more than enough official inflows to finance a growing external deficit -- even if it is attracting far smaller official inflows than the US.