Countries with large current-account surpluses such as China and Germany need to boost domestic demand to help correct imbalances that are limiting global growth, the IMF said.
There’s been little progress over the past several years in reducing such imbalances, which also contribute to financial instability, International Monetary Fund staff said Tuesday in an annual report analyzing external balances and exchange rates.
China’s current-account surplus and the U.S.’s deficit continue to be the biggest forces driving global imbalances, even though both measures have narrowed since before the financial crisis, the Washington-based lender said.
It’s “critical” for China to adopt a flexible, market-based exchange rate, and the nation should take steps to raise consumption and open up the financial system, the IMF said. While the yuan traded at levels 3 percent to 12 percent below the level “consistent with medium-term fundamentals and desirable policies” last year, recent appreciation in the currency means it’s no longer undervalued, according to the fund.
The conclusion on the yuan repeats an assessment offered in May and contradicts the U.S. position that the currency remains undervalued. The IMF is separately reviewing this year whether the yuan is widely-enough used to warrant reserve-currency status.
The U.S. dollar is currently trading “moderately above” a level consistent with fundamentals, the IMF said.
“At best, inaction on excess imbalances would mean a lost opportunity, settling for a mediocre global outcome in terms of growth and stability,” IMF First Deputy Managing Director David Lipton said in a statement. “Insufficient action to reduce excess deficits would mean additional risks to financial stability.”
Along with China and Germany, Lipton flagged South Korea as a country that should reduce its current-account surplus. He also noted the deficits in the U.K., Brazil and France.
Correcting the global imbalances requires an adjustment by both surplus and deficit nations, which should take steps to boost growth in domestic demand, he said.
“Adjustment of real exchange rates, though it would not suffice on its own, is also essential, and policies should facilitate rather than obstruct that adjustment,” Lipton said.
Recent currency volatility has been a “natural” response to shifts in commodity prices, especially oil’s plunge, as well as divergences among economies in terms of growth, inflation and monetary policy, he said.
The IMF report estimates the U.S. dollar may have been overvalued by as much as 10 percent last year. The fund recommends the federal government aim for a primary budget surplus of about 1 percent of gross domestic product over the medium term. The IMF also suggests structural reforms to improve productivity and labor-force growth.