Imbalance

“Life is like riding a bicycle. To keep your balance you must keep moving” – Albert Einstein

In my October 2014 article (http://poleconomyindia.blogspot.in/2014/10/deflation-and-liquidity.html) I had pointed how the global imbalance in savings and investment was at the heart of the global slowdown. I had written “The other side of this coin of global slowdown and imbalances as I have pointed earlier is the saving-investment (S-I) mismatch. Globally, Savings has to be equal to Investments. But as country, if savings is greater than investments it manifests itself in the country having a current account surplus (exporting capital) and vice versa.” Another way of arriving at current account is (X-M)+NY+NCT, where X and M are respectively the export and import of goods and services, NY the net income from abroad, and NCT the net current transfers. The table below shows the trends in current account balances since 2007:

Country / CA ($bn)	2007	2012	2015E	2020E
US	–718.6	–449.7	–460.6	–746.9
Euro Area	10.6	154.1	364.6	326.8
Germany	232.5	240.8	286.3	270.3
France	–8.0	–32.0	–5.2	–7.9
Italy	–31.3	–8.9	37.0	10.1
Spain	–142.9	–3.8	10.6	22.4
Japan	212.1	59.7	124.3	130.7
UK	–81.3	–98.2	–135.8	–86.1
Other Advanced	192.8	266.6	319.7	312.7
Russia	71.3	71.3	61.8	80.5
China	353.2	215.4	347.8	95.3
India	–15.7	–88.2	–30.4	–86.5
Brazil	1.6	–84.4	–72.8	–78.2
Mexico	–14.7	–16.4	–27.9	–31.9
Larger Middle-East	264.9	419.1	–113.4	–14.2

Source: IMF

Quick takeaways on the past trends:

• US, UK, India and Brazil continue to be the demand centers of the world of which US is the outsized buyer of global demand;
• With the German imposition of fiscal discipline in the Euro area demand in the southern European states have contracted dramatically;
• Japan’s change in balance has been more due to the nuclear power shut-down post Fukushima and consequent increase in energy imports;
• Russian oil exports will contract dramatically but so will imports leaving the balance in place but with a contracting GDP;
• Middle-East will play out very similar to Russia only to the extent that given the outsized social spends they may not be able reduce imports as fast;
• China growth decline is having an outsized impact on metal exporting countries and the declining currency should continue to counteract the desire to rebalance towards a consumer economy. The data below plays out the dramatic impact of China’s slowdown will have on the commodity exporters:

Bilateral Metal Trade (US$ m)	2002	2014
Australia	1,043	52,153
Brazil	605	12,851
Canada	90	2,496
Chile	784	15,249
Peru	196	5,621

Just as an aside, this decline in global commodities will cause a dramatic shrinkage and asset problems in financial balance sheets across the globe.

Where I disagree with the IMF forecasts for 2020 is on four key linear un-said assumptions underlying these forecasts:

• Americans will continue to tolerate their demand being used by other nations to allow things to revert to 2007 (despite shale oil) and will not turn protectionist or have preferential trade deals (i.e. TPP is designed to exclude the Chinese and therefore changing supply chains);
• Technology innovations like additive printing or solar energy will make no impact on manufacturing locations (Germany, Korea, Japan) or on energy producers (Middle-east);
• Chinese will be able to generate significant domestic consumption in a short period of 5 years despite adverse demographics, currency decline and inequality (http://poleconomyindia.blogspot.in/2015/08/china-everything-overdone.html);
• Southern European countries will continue with the German mandated fiscal bounds and bear the high unemployment and internal cost adjustments (i.e. wage deflation).  

As we can see the global imbalances continue to be substantially where they were in 2007. A quote from T. S. Eliot summarizes it wonderfully, “We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.”

Post-script

Oil ($)*	1997-2006	2007	2012	2014	2015E	2016E
	31.2	71.1	105.0	96.3	51.6	50.4

Source: IMF, *Simple average of prices of U.K. Brent, Dubai Fateh, and West Texas Intermediate crude oil

Oil prices have been on a downward tear since 2014 crushing inflation across the globe causing an estimated shift in resources exceeding $1 trillion. Current price for this resource in under $40, markets looking to push it under $30. This may, however, turn out to be the savior of global central banks if it completes its correction in 2016 and rises enough to boost global inflation to 2%. If it overshoots, it turn out to be nightmare but there is always cover available under Core CPI which the central banks may use but I as a consumer do not care.  (US example - “The BLS does track Energy as a separate aggregate index, which in recent years has been assigned a relative importance of 8.030 out of 100.”)