Has the usa become less important for the world economy??

The international monetary fund analyzes u.S. Imbalances and the consequences of a possible u.S. Recession

The international monetary fund has published two chapters of the current report "world economic outlook" the imf’s second annual report is devoted to the burning ies of international finance: the imbalance in the u.S. External balance sheet and the impact of a u.S. Recession on the global economy, should one actually break out.

The u.S., which accounts for about one third of the world’s gdp, currently absorbs – on credit – about three quarters of the world’s export surpluses. While it is relatively clear that the huge u.S. Current account deficit cannot be sustained forever, the international monetary fund (imf) is currently unable to find any consensus on how and when these imbalances could be corrected. In particular, it is unclear what role exchange rates will play in this process.

Although the imbalances – as the imf also emphasizes – are currently reaching unprecedented dimensions, the imf nevertheless tries to find a solution to this conundrum using historical examples. An oconometric analysis of examples from the last 40 years is used to determine the impact of changes in growth differentials between creditor and debtor countries, on the one hand, and changes in real exchange rates, on the other, on the resolution of such imbalances. 13 cases of sustained high current account deficits of industrialized countries are analyzed, which – like the u.S. – had accumulated their deficits mainly against developing countries and oil exporters.

Has the usa become less important for the world economy?

Graphs: imf

On average, deficits were four percent of respective gdps at the beginning of the anpang, followed by a reversal of six percent of gdp in the following four to five years. This was accompanied, on average, by a real devaluation of the debtor country’s currency by a total of 12 percent, with most of the devaluation having begun prior to the anpang. Domestic growth in the debtor country in the initial phase was on average 1.5 percent lower each year than in the years in which the deficits were accumulated.

However, these values were very broadly spread. Thus, the imf identifies a group of countries that bought their rebalancing with a drastic drop in growth of 3.5 percent. This trap was also characterized by a sharp drop in investments, a very high initial deficit and a low openness of the trade regime. On the other hand, the real depreciation of the national currency was relatively modest at an average of eight percent, which, according to the imf, was mainly due to the respective currency regimes, since most of them had a more or less fixed peg to a reserve currency.

On the other hand, there was a group of "expansionary" pegs which, on average, were able to increase growth by three quarters of a percent in the initial period compared with the deficit period. In these cases, however, the devaluation of the currency was much more pronounced at 18 percent, which, according to the imf, led to significant increases in both exports and the savings rate. The higher savings rate was achieved primarily through falling budget deficits, which meant that the decline in investment was much less pronounced than in the other group. For the historical correlation between currency devaluation and growth slowdown, the imf calculates that a ten percent devaluation would lower the growth slowdown by around 0.5 percent.

With regard to the current u.S. Deficit, the key question for the imf is how the expected decline in the value of the dollar will affect exports and imports. Here, the imf finds evidence that the current economic calculation methods, which predict extremely severe dollar devaluations, do not take into account the so-called price elasticity (how much the rising import prices caused by the weaker dollar will reduce imports or how much the weaker dollar will reduce imports). Falling export prices increase u.S. Exports) clearly underestimated. For, according to the current models, a reduction in the u.S. Current account deficit of only one percent of u.S. Gdp would require a devaluation of 10 to 20 percent-which would require at least a halving of the value of the dollar if a decline of at least five percent were required (currently the decline is close to seven percent, with two to three percent considered affordable in the long run).

Imf experts now suspect that the price elasticity of u.S. Foreign trade is being systematically underestimated. For example, the truth-driven price increases were passed on to u.S. Consumers much more slowly than in the models, which, for example, delayed the effect of the 15 percent devaluation of the dollar since mid-2002, which, moreover, had so far been offset by the sharp rise in oil prices. Now, however, this was beginning to take effect, as the imf observes. In addition, the international fragmentation of production processes, as evidenced by the massive increase in international trade in components and intermediate goods, could have significantly increased the elasticity for a steadily growing group of traded goods. According to imf calculations, both effects together could double the effect of a dollar devaluation in extreme cases, so that even a comparatively small devaluation could be sufficient to offset the imbalances – even though the imf does not explicitly state this figure, the imf calculations give a range that is more likely to be 20 to 30 percent than 50 percent.

According to the imf, however, the prerequisite for this rather mild dollar slump is an increase in the savings rate of u.S. Households, which has recently been negative for most of the time, to a level of "normal" level, as well as serious budget consolidation and an increase in imports from strong exporters such as z.B. China and the olexporters. They also had to allow their currencies to appreciate against the dollar, which, as the example of china shows, does not necessarily have to happen to the desired extent. However, under these conditions, the necessary decline in u.S. Growth could then also be relatively modest, as the imf believes.

In the very next chapter, however, the imf deals with the possible consequences of a u.S. Recession for the world economy, but here, too, it has rather rearing news to report. While u.S. Recessions have always had a hefty impact on growth in the rest of the world so far, the old adage had "when the us economy sneezes, the rest of the world gets the flu", now only limited validity. For example, the current (albeit so far rather slight) decline in u.S. Growth has so far had no discernible effect on the global economy, which continues to boom overall. According to the imf, this may be due to the fact that this time, the decline in growth ("corrections in the housing and manufacturing sectors") and not – as has been the case so far – also internationally effective causes such as oil price shocks or stock market crises. In addition, the importance of the usa as a trading partner has declined for many countries in the course of globalization and, last but not least, rising growth outside the usa has so far been able to compensate for the less pronounced increase in us demand.

According to the imf, however, there are also a number of risks. Thus, the slight decline could only be the harbinger of a much more severe u.S. Slump. In addition, the decline in the importance of the usa as a trading partner is offset by the increasing us dominance of the financial markets. The imf also wonders whether growth in europe and some emerging markets is actually sufficiently dynamic to offset a u.S. Crisis.

Should there actually be a "soft landing", the hoped-for mild downturn in the u.S. Economy, the imf believes that the negative impact on the global economy – with the exception of trading partners heavily dependent on the u.S., such as canada and mexico – would remain modest. In the event of a severe downturn, however, the rest of the world would inevitably be affected, both industrialized and developing countries. However, the growth losses should not be quite as severe as in the u.S.A. Itself and should be rather milder compared to previous episodes.

Nevertheless, the imf counters the view that the importance of the u.S. For the global economy has diminished. Rather the opposite is the case. The only difference is that economic and monetary policymakers around the world now have a better chance of cushioning a downturn in growth by means of forward-looking monetary and fiscal policies. As the imf hopes, most central banks were currently in principle sufficiently competent and capable of acting to ensure this

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