Is America's Current Account Deficit Sustainable?
- Globalization May Boost Deficit to 6% of GDP -
October 17, 2006
This report explores the background to the worldwide growth of current account imbalances in recent years, from a money-flow perspective, and considers how big America's current account deficit may grow, and how far it can be sustained.
Since the late 1990s, current account imbalances have been growing around the world, with variation in the current account-nominal GDP ratio growing, even among OECD member countries. At the same time, an examination of the relationship between gross investment ratios and gross savings ratios reveals that, until the 1980s, investment tended to be restricted by savings, but that, in recent years, the connection has become weaker, and that the liberalization of the international movement of capital may have contributed to the increasing imbalances worldwide. This is because the liberalization of the international movement of capital has made it easier for countries with more growth opportunities to use overseas savings (boosting their current account deficit) and for countries with fewer growth opportunities to use their excess savings overseas (boosting their current account surplus), thereby tending to expand imbalances.
One reason for the growth of America's current account deficit is that the economy has grown so fast that the US has built up excess savings overseas. If the level to which America's current account deficit can grow is considered in the light of the impact of the liberalization of international capital movement, then, due to the weakening of the home country bias among OECD members, it is estimated that the tolerable limit of America's current account deficit-nominal GDP ratio, which in the 1980s was considered to be –3%, has now grown to more than –5%. In future, the complete elimination of the home country bias among OECD members, and progress in the liberalization of capital among non-OECD countries, may increase the tolerable limit still further.
However, it is not certain that a current account deficit of this level can be unconditionally sustained. An examination of current account-nominal GDP ratios among OECD countries reveals that the higher a country's rate of return on investment (real GDP growth rate/real capital stock), the larger its current account deficit ratio tends to be, and that, by contrast, the lower a country's rate of return on investment, the larger its current account surplus ratio tends to be. Accordingly, maintaining a healthy flow of capital into the United States will require that the United States continue to maintain a high rate of return on investment as compared with other countries. However, the fact is that the rapid growth of the US economy in recent years has been achieved through excessive consumption in the short term rather than through capital investment that will lead to a rise in the return on investment in the future, casting uncertainty over the continued flow of capital into the country.
The flow of funds into the United States is linked to the ratio of capital investment to nominal GDP. Accordingly, the question of whether or not a substantial flow of funds into the United States can be maintained depends on how far that country is able to achieve continued capital investment growth while maintaining a high rate of return on investment. A survey of the capital stock cycle in the United States suggests that, without an upward shift in the expected growth rate, pressure on capital investment for stock adjustments will begin to grow from around 2008. In view of the slowing of growth in IT-related investment, with the upward trend of labor productivity and the potential growth rate beginning to slow, the outcome of the current account deficit problem depends to a great extent on whether or not the United States is able to make the switch from a pattern of growth led by excessive consumption to one of growth led by high-quality capital investment, such as IT-related investment, raise its potential growth rate and so increase its rate of return on investment.
For more information on the content of this report, please contact Takeshi Makita, the Japan Research Institute, Limited.