The dominance of the US as the spender or demander of last resort before the crisis, and the importance of the global growth rate in accounting for the surpluses of Germany hints at the limited viability of large future current account surpluses of China and Germany. This may especially be the case if the drop in US current account deficit/GDP ratio endures beyond the crisis period. In the global equilibrium, the sum of all current accounts should add up (up to statistical discrepancy) to zero. Hence, focusing on the creditors as the source of the challenges facing the global economy overlooks the contribution of the US itself to global imbalances. Similarly, focusing only on the debtor(s) would overlook the need for all parties to move from the pre-crisis state of affairs to the post-crisis one.
There are reasons to expect that the pre-crisis trends may be unsustainable. To recall, in 2000–2007, the US current account deficit/GDP was about 4–5%, funded partially by Chinese surpluses of about 8–10%, and significant current account surpluses of oil exporters, and few other countries. Looking forward, demographic factors are likely to impose important balancing effects on future current account trends.
Figures 6 and 7 suggests that future demographic transitions would work towards narrowing the surpluses on China and Germany. During the next 30 years, the dependency rate of the old (the ratio of population aged 65 years and older to the working age population aged 15–64 years) in Germany and China would increase dramatically relative to the US. The dependency ratio of the old in the German and Chinese population is projected to increase during 2010–2035 by about 24% and 19%, respectively, whereas that of the US would increase by 14%. The dependency ratio of the young (the ratio of population aged 65 years and older to the working age population, aged 15–64) in Germany is projected to increase by 2%, whereas that of the US and China are predicted to go down by 4% and 2%, respectively. These trends may work towards mitigating the surpluses of China and Germany. Table 4 summarizes the projected changes in the dependency rates, and their projected marginal contributions, applying the regression results of Gruber and Kamin (2007). The demographic transitions of China and Germany in the next 25 years are projected to reduce their current account/GDP by about 2.5% and 3.5%, respectively. This effect is stronger for Germany, reflecting the greater increase in the old dependency rate in Germany. These adjustments tend to be front-loaded, as the old dependency ratio curves in Figure 7 follow logistic patterns, and hence this process is likely to kick-in early on. The demographic transition in the US is projected in increase US current account deficit/GDP by 2%. Consequently, the projected demographic transitions in China and Germany would reduce their current account surpluses, mitigating their contribution to global imbalances. In contrast, the projected demographic transition in the US would increase US current account deficit, suggesting that demographics would not mitigate the need of the US to increase its net savings.
While projecting future GDP growth rates may be subject to larger standard errors than projecting demographic trends, most observers expect the growth rates of China and other emerging markets to exceed that of the US and the OECD countries by a large margin. This trend has important repercussions on the future global imbalances, and the current accounts of China and Germany. A small country embarking on an export led growth, like China in the 1970s, can sustain it without imposing negative ripple effects as long as its relative size remains small. However, the long run success of the Chinese growth strategy may put in motion forces that may curtail the sustainability of a high GDP growth rate and a large current account surplus path. By now, China has reached a critical mass of “an elephant running in a China store.” The continuation of the fast growth rate of China, while maintaining large current account surplus/GDP, would be conditional on the sustainability of larger current account deficit/GDP of countries that grow at a much slower rate. This can be illustrated by investigating the size distribution and the durability of current account deficits, and by a simulation that relies on the adding-up property of current account balances, which, up to statistical discrepancies, should sum-up to zero.
Aizenman and Sun (2010) found that, with the exception of the US, the duration of spells of current account deficits during the decades prior to the 2008–09 global crisis depended negatively on the relative size of a country, as measured by its GDP/World GDP. The continuation of the pre-crisis path of the Chinese GDP growth rate, exceeding 10% a year while sustaining a current account/GDP ratio of 10% would require overtime, large increases in the current account/GDP ratios of large players, like the US. Short of the emergence of a new demander of last resort, one may reasonably expect the unwinding of global imbalances in the coming years. This follows the observation that the US is already facing deleveraging “stabilization blues.” The housing market weaknesses and the resultant private sector deleveraging point to probable reduction of consumption and increase in saving, thereby curtailing US current account deficits [see Glick and Lansing (2009)]. Similarly, the Greek crisis has put in motion forces reinforcing belt-tightening in Southern Europe. Coupled with this, the differential attitude towards fiscal policy of the core of Western Europe, i.e. of France and Germany, suggests that Europe may not be eager to replace the old role of the US as the global demander of last resort. EU’s tendency to run on average, balanced current accounts remains an issue that deserves further exploration. Arguably, this may reflect the greater political bargaining clout of labor in Europe relative to the US. In circumstances when current account deficits are driven by balance of trade deficits, labor may oppose larger deficits to mitigate downwards wage pressure.Footnote 7
The unwinding of global imbalances may be facilitated by a gradual shift of China from export led growth, towards a balanced growth of internal demand, a strategy that may be consistent with the continuation of Chinese employment and GDP growth [see Feenstra and Hong (2010)]. In addition to this, the continued rise in global GDP share of emerging markets may provide a further impetus for Asian countries to switch towards heavier reliance on policies boosting domestic demand. This in turn suggests the presence of market forces that may induce China and other emerging markets to scale down their current account surpluses over time. Thus, we may expect that short of the emergence of a “new demander of last resort” replacing the US, the Chinese growth path would be challenged by the limited appetite for prolonged current account deficits of most countries, and Europe would continue running close to balanced current accounts.