Sustaining Global Growth while Reducing External Imbalances

Abstract

With renewed deterioration of the external balance in recent months, it now appears that the US current account deficit will exceed $600 billion in 2004—or over 5⁄2 percent of US GDP. Plausible estimates suggest that, at present exchange rates and with US economic growth continuing to exceed that of most other industrial countries, the US external deficit could reach $1 trillion or more by the end of this decade. The cumulative effect of the persistent external deficits of the past 30 years (which have averaged about 3 percent of US GDP) is already reflected in the transformation of the United States from the world’s largest net creditor to the world’s largest net debtor. Specifically, the United States has shifted from a position in the mid-1970s when US net external assets exceeded 25 percent of US GDP to a position where US net external liabilities now exceed 25 percent of annual GDP. If current account deficits persist at a level of more than 5 percent of GDP (and rising), the US external liability position is on track to reach 50 percent of GDP within a decade and to exceed 100 percent of GDP within the next 25 years. It is possible that US current account deficits of 5 percent or somewhat more of US GDP could persist for a while longer. And there is no indication yet that the prospect that US net external liabilities might reach 50 percent of US GDP is a cause for fright and likely instability in global financial markets. However, there is good reason to doubt that US current account deficits of 5 percent or more of GDP can be sustained indefinitely

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