Global current-account imbalances are back, bringing with them deflationary forces and slamming the brakes on global growth.
That's the sobering conclusion of an HSBC Holdings Plc report published on Thursday, which laments that an effective, international policy response to the problem is likely to be a long way off.
Last year represented an inflection point for the global economy according to Janet Henry, the bank's global chief economist. After moderating slightly after the financial crisis, current-account imbalances have started to widen once more, with the surpluses of Germany, China, and Japan – the world’s three largest surplus nations — increasing both in dollar and GDP-share terms. By the former metric, HSBC calculates that this year global imbalances will be close to 2007's record highs.
"Excess savings from surplus economies were widely blamed for the misallocation of resources that ultimately led to the global financial crisis," Henry writes. "So the fact that global imbalances are growing again should be ringing alarm bells."
This school of thought sees the financial crisis as having, at root, to do with unsustainable current-account positions, with a deficit-ridden U.S. consuming the excess production of China, which runs a surplus, just as Germany's export of its savings to peripheral Europe are held to have triggered a credit boom there.
While countries that operate large current-account deficits have been vocal in complaint, Henry points out that it's not just deficit nations that suffer. Echoing what John Maynard Keynes dubbed the paradox of thrift, she refers to how excess savings depress global output as a whole, threatening the value of creditor nations' savings. She says the most notable case today comes from China, whose large-scale investments in low-yielding U.S. Treasuries are symptomatic of the low returns on offer in a world rife with these imbalances.
"These savers could not only face low returns and capital losses on their massive investments overseas; they also risk locking in low growth now that the export engine is running slow. If they do not deliver stronger growth in domestic demand then global growth is likely to stay weak and the deflationary influence they exert on the rest of the world will persist."
Henry is far from the first to bemoan the situation. Last year, former Federal Reserve Chair Ben Bernanke wrote that, "Germany's trade surplus is a problem," while Peking University Professor Michael Pettis and Nomura Research Ltd.'s Richard Koo have long called for action to address China and Japan's surpluses, respectively. Despite repeated warnings from these luminaries, Henry isn't optimistic on the potential for these imbalances to be remedied in the near future.
For all three nations, finding a way to increase demand is the key. HSBC argues that Japan should embark on more aggressive measures to push businesses to invest. As for Germany, this will be the third consecutive year the country has run a budget surplus, exceeding its own constitutional requirement to run a balanced budget.
China too is embroiled in a policy bind. It wants to engineer a jump in household income — to boost the relative share of domestic consumption in its economic output — in part through supply-side measures, and by liberalizing its capital-account. But this medium-term rebalancing goal conflicts with Beijing's bid to stabilize the credit cycle.
Reining in this three-headed monster of imbalances may prove to be as difficult as the last of Hercules's twelve labors: the capture of Cerberus, the three-headed hound of the Underworld. Says Henry, "When we look at the options, it seems like some of the required internal and external adjustments may well happen over time but we have little confidence that much of this will happen quickly, implying these imbalances will pose ongoing growth and financial stability risks to the global economy."