The authors of the IMF’s World Economic Outlook have a difficult job. They have to forecast the trajectory of the global economy — itself not an easy task. Their forecast will be judged and evaluated in real time. But the work according to a schedule set by the need to consult the IMF board and the demands of physical rather than virtual publication. In practice, that means that the forecast never fully reflects the most recent data. “IMF Board” time, “internet” time and “market” time are all very different things.

Sometimes that doesn’t matter. But right now is one of the times when it does. A lot happened this September. And I suspect that much of what has happened isn’t reflected in the IMF’s forecasts.

Specifically, I now expect a larger fall in US output and a larger fall in the US current account deficit — and for that matter, the combined current account deficit of the US and the EU — than the IMF currently forecasts (see the WEO’s data tables).

In the past I have argued that the IMF has had a tendency to forecast problems like the US current account deficit away, and in effect assume that the US current account deficit would tend to shrink even if neither China nor the US adjusted their policies. The IMF has also tended to downplay the role the official sector has played in financing the US.

Now I suspect that there will be more adjustment than the IMF expects.

Specifically, the IMF now forecasts that the 2009 US current account deficit will fall to $485b in 2009 (around 3% of US GDP)– well below its 2006 peak of $790b, and down from an estimated $665b in 2008. The deficit has been running at around $700b, so the IMF is forecasting a fall in the deficit in the second half of the year (see Table A10).

Read more »

It is hard to focus on a routine, backward looking data release amid the most profound financial crisis the US has experienced in a long-time — a crisis that in its own way will likely rank among the most significant events of recent history. I am not sure if the (apparent) fall of Wall Street ranks up there with the fall of the Berlin Wall, but it does feel like an era has passed.

Questions are beginning to be raised about the United States’ ability to finance itself. Moreover, the questions are being framed appropriately: rather than focusing on whether private investors want US assets, folks are debating whether China will still want US assets. And looking back is probably as good a way as any to begin to answer those questions.

Despite the big contribution from net exports to US GDP growth in q2, the current account deficit didn’t fall in q2. Blame high oil prices. The rise in the petroleum deficit offset the improvement in the non-petroleum deficit. The recent improvement in the income balance also came to a halt, largely because the profitability of US firms investment abroad didn’t jump up. In a lot of ways, though, the current account release matters more for the data on capital flows than for the data on the current account.

However, reading the capital account data takes a bit of skill — or at least knowledge of how the data is likely to be revised over time. One example should suffice: back in early 2007 (before the data from the June 2006 survey or the June 2007 survey had been released and incorporated into the data), the US estimated that official creditors — sovereign funds as well as central banks — had provided the US with about $300b in financing in 2006. That implied the majority of the current account deficit* had been financed by private inflows. The most recent data release — which reflects the information about flows in the first half of 2006 from the 2006 survey and the information about flows in the second half of 2007 from the 2007 survey — indicates that the official sector provided about $500b in financing to the US back in 2006.

The scale of these revisions raises questions about a lot analysis that suggested that official inflows weren’t a major reason why Treasury yields remained low in 2005 and 2006. That analysis was based on the observation that yields didn’t rise after official flows – as reported in the TIC data — fell. Alas, it turns out that official flows didn’t actually fall. The TIC data just didn’t capture most of the flow — as China and the Gulf tend to buy through London. After the survey revisions, the US now thinks official flows for 2006 topped official flows in 2004.

What of the last four quarters? The US data indicates that official creditors provided the US with about $400b in financing — less than in 2006. It also indicates that “private” investors abroad bought about $250b of Treasury bonds (including short-term bills). If you believe that private investors abroad bought that many Treasuries, I have a lot of formerly triple AAA CDOs stuffed with subprime debt that I want to sell you at par.

Read more »

I get a feeling that the July trade data is the last hurrah — or close to it — of the “decoupled, weak US dollar, high oil prices and strong US exports” world. The reason for the large upward blip in the July trade deficit is simple: both oil import volumes and the oil price rose. The average price of imported oil topped $125 for the first time. And in July, net petroleum import volumes (using real petroleum trade balance as a proxy, it is in exhibit 11) were down “only” 2.1%. Net import volume was down 14.8% in June. Basically, July looks to be payback for June. Nor the year, net petroleum import volumes are down 9.1%. The petroleum deficit increased by $6b in July alone.

Everything else was more or less as expected — exports continue to be strong and real non-petroleum goods imports continue to be weak (with price rises pushing the nominal total up). The “real” non-petroleum deficit is improving. The overall deficit isn’t. Calculated Risk’s graph tells the story clearly. The goods and services deficit this year through July is up a little compared to last year ($420b v $416b) — but it is up far less than the overall petrol deficit. The petrol deficit for the first seven months was $90b larger than the deficit in the first seven months of last year. And the July petrol deficit was $43.4b — by far the largest component of the overall deficit.

But help (lower oil prices) is one the way; the q4 goods and services trade deficit should fall significantly. Yet if the bad news on petrol looks to be (mostly) over, so too might be the goods news on exports. After all, the same forces that pushed up oil (a strong global economy and a weak dollar) also pushed up US exports. There isn’t much sign of such a slowdown in the July data though; the slowdown in real export growth that worried me earlier this year is past. Real exports are rising fast, while real imports continue to stagnate. Look at the following graph, prepared with help from the CFR’s Arpana Pandey:

Looking at the y/y change in a three month moving average of goods imports, goods exports and net exports tells the broad story well.

Read more »

In July, China posted rather impressive export growth — all things considered. US imports from China in July aren’t known, but US imports from China were only up 2.9% y/y in June. During the first half of the year, US imports from China are only up 4.2%. The US hasn’t been driving Chinese export growth — Europe has.

And in June, US exports were up 21.1% y.y ($164.4b v $135.7b). Non-petrol good exports were up 17.7% y/y — so it wasn’t all driven by higher prices on the United States (small) petroleum exports. Real goods exports were up 11% in June, and 9.6% for the first half of the year. And real non-oil goods imports aren’t growing. Real non-petrol goods imports in June 2008 were 2.7% lower than in June 2007 — and for h1, real non-petrol goods imports are down by a bit less than 1%.

Exports of corn, beans (and other oilseeds) and wheat are up 90% in nominal terms, rising from $13.6b in the first half of 2007 to $25.9b in the first half of 2008. It isn’t all just higher prices — real exports of foods, feeds and beverages are up 10%. The United States’ financial capital should be grateful it is linked in a currency union to the agricultural Midwest; think where the dollar would be if the US only exported repackaged residential mortgages. Quips about flyover country should stop …

Not so long ago, important voices often argued that exchange rates had little effect on trade — and particularly no effect on US-Chinese trade. I though would challenge anyone to explain — credibly explain — how both China and the United States experienced strong export growth in the first half of this year without mentioning exchange rates. Dollar depreciation is having the expected effect on US exports. And the RMB’s depreciation against the euro has had the expected effect on China’s exports to Europe.

There is only one problem with this story. Bringing the US deficit down, it now is clear, required dollar depreciation, stronger demand growth outside the US than inside the US and stable oil prices. Strong global growth in particular cuts both ways — as it pushes up the price of oil and thus the US oil import bill even as it pushes US exports up. Falls in the dollar also cut both ways, at least to the extent that dollar weakness pushed oil up. I personally find the argument that high oil pushes the dollar down a bit more compelling, but there is a big debate on this.

In the first half of the year, the US non-petroleum goods deficit fell by $51 billion. But the petroleum deficit increased by $69 billion, pushing the goods deficit up. The services surplus improved by $25b — bringing the overall deficit down a bit, but only a bit.

Read more »

1. Net petroleum imports fell by $1.6b. Petroluem exports rose by 0.96b while imports FELL by $0.66b in dollar terms. The fall in imports was a surprise. Oil prices rose by 9.7% or so. But import volumes were down by over 10% from April (and 14% lower than their 2007 average). The good news is that the US is importing significantly less petrol than in the past. The bad news is that the price of imported petrol isn’t going to stay at $106 a barrel.

2. The non-petroleum goods balance actually deteriorated slightly. Relative to exports, non-petroleum goods imports were up $1.8b, and non-petroleum goods exports were down $0.4b. The y/y rise in non-oil imports in May (6.9%) is higher than the y/y rise in the January through May data (4.5%), which likely reflects higher non-oil import prices more than anything else.

3. Y/y real goods exports were up close to 10% (9.4%) in May. Real imports were up less than 1% (0.8%). The slowdown in real export growth a few months back hasn’t been confirmed in the recent data. Real exports continue to do well.

4. The US trade deficit with China is flat so far this yea: $96.0b v $96.3b. Imports from China are only up 4.4% so far this year — a pace consistent with the overall increase in non-oil imports. The combination of RMB appreciation v the dollar, rising inflation in China, rising transportation costs and a slowing US economy is having an impact. US exports to China are up $5b (comparing the first five months of 2008 to the first five months of 2007); US imports from China are only up $5.4b. The slowdown in the pace of import growth has contributed far more to the stabilization of the trade deficit than the (strong 19.7%) percentage increase in exports. That US still imports about four times as much from China as it exports.

UPDATE: Spencer provides a nice summary of real export and import trends over at Angry Bear.

Creditors through the ages haven’t liked to take policy advice from debtors. They generally tend to think that borrowers should listen to the advice offered by those lending them money. And they often think debtors fail to pay sufficient attention to the concerns of their creditors when formulating economic policies.

Sound familiar?

China believes that the US hasn’t paid enough attention to the dollar’s value. That isn’t exactly news. Wen more or less said as much in November. Nor should any American be surprised that China no longer the US financial sector offers the best model for the future development of China’s own financial sector. Securitizing risky mortgages loans into complicated financial structures no longer looks like the highest stage of financial evolution.

But I was still struck by Edward Wong’s front page New York Times article several weeks ago. It highlighted China’s new assertiveness — and China’s increased willingness to criticize US economic policies.

Steven Weisman’s C section article that followed the completion of the Strategic Economic Dialogue wasn’t that different than Edward Wong’s big front page story. The governor of China’s central bank now argues that China needs to learn from the United States’ mistakes as well as its successes. Clever rhetoric. Those who think that the United States needs to learn from its own recent mistakes would have trouble disagreeing with Mr. Zhou.

These articles raise some fundamental issues about how China’s economic and financial relationship with the US will evolve. Right now China has lent — according to the US data — about $1.1 trillion of its savings to the US. Realistically, it has lent a bit more — let’s say $1.3 trillion. The US data tends to undercount Chinese holdings of US assets.

That is a large sum by any measure — it is roughly 10% of US GDP, and it is more like 30% of China’s GDP. given the extraordinary pace of growth in China’s foreign assets — and its large current account surplus — China’s financial exposure to the US is set to increase rapidly.

Many — see Gideon Rachman as well as the FT’s Alphaville — have argued that the growth in financial interdependence between the US and China will reduce political tension between the two. China has a large and growing financial stake in the US economy; the US relies on Chinese financing. Their economic interests consequently largely converge.

Read more »

One might be “Foreigners love US Treasury bonds.” Foreign investors bought $80 billion of long-term Treasuries in April, and another $3.3 billion of short-term bills for good measure. Anyone who really believes that private investors bought $58 billion of Treasuries (including $48.52b bought by investors in the UK) hasn’t been paying close attention to the data. These are almost certainly central bank purchases. For all the attention that sovereign wealth funds have attracted, the real story of the past year – in my view – has been a flight to safety by sovereign investors. That flight – while understandable – has added to the dislocation in the credit market, not reduced it.

Another might be “Americans priced out of foreign markets.” US investors sold $10.3 billion of foreign securities in April. They also sold $1 billion in March, and bought $13b in February. That implies zero net purchases over the past 3months. A more charitable headline would be that Americans are taking profits on their investments abroad, or that Americans are now finding value in their own financial assets. The fall in US demand for foreign securities is clearly dollar positive.

Another is that “China bought a ton of US debt.” It bought $31.5b of long-term debt, while reducing its short-term holdings by $2.7b. That works out to $28.8b in net purchases – or enough to finance about ½ of the US trade deficit in the absence of any US capital outflows. The funny thing is that this almost certainly understates China’s true purchases of US debt. In the past few years, about ½ of the Treasuries purchased by the UK have been reallocated to China in the annual survey (see the June revisions to this series). We know that China’s reserves increased by about $80 billion (after adjusting for valuation gains) in April, so it is realistic to think that China’s true purchases of US assets were closer to $60 billion than $30 billion.

Another might be “Russia loses confidence in the Agencies.” That headline is perhaps overstated. But Russia certainly does seem to be shifting from short-term Agencies (other short-term negotiable securities in the data) and into short-term Treasuries. It sold about $9 billion of short-term Agencies and bought about $15 billion of short-term T-bills.

A final potential headline might be “the Gulf hires a magician to make its petrodollars disappear.” They certainly vanished from the US data. Net long-term purchases by the Asian oil exporters were only $0.3 billion, and short-term holdings only rose by $1.2b – for a total inflow of $1.5 billion. The Gulf is probably running a monthly current account surplus of $25 billion (off monthly oil export revenues in excess of $50 billion). There is a lot of Gulf cash floating around that isn’t showing up in the TIC data.

Rather than telling these stories with words, though, I thought I would illustrate a few of the stories with graphs that Arpana Pandey of the CFR has prepared using the TIC data. She has combined the TIC flow data with the survey stock data to generate an ongoing estimate of the US debt held by key countries around the world.

Read more »

I am often struck by how frequently debates over trade – and, more broadly, globalization – don’t bother to mention what strikes me as the most salient fact about contemporary globalization, namely that it has been marked by an enormous amount of government intervention in the foreign exchange market and a huge surge in the sale of US financial assets to emerging market governments.

Rather than trading US made goods for goods made in the emerging world, the US has – over the last say thirty years – financed the growth in its imports from the emerging world by selling US financial assets. That has to have had an impact on the composition of output in the US – -and the distribution of gains on globalization. It has favored those who generate financial assets (and import goods) over those who produce goods, for example.

And it seems increasingly difficult, at least to me, to maintain this pattern is entirely the product of the operation of free markets. Not so long as key governments are intervening so heavily in the foreign exchange market – and hoarding most of the oil windfall.

Take the most extreme example: China.

If 2000, China exported around $250 billion worth of goods, and its government bought about $15 billion of foreign exchange in the market. In 2008, China is on track to export about $1400 billion worth of goods, and its government is on track – at least judging from the April data — to buy about $900 billion of foreign exchange in the market.

Yet the popular discussion of trade and globalization rarely also mentions the enormous rise in government intervention in the markets – and the surge in the sale of US financial assets to emerging market governments.

Read more »

The $60.9 billion monthly April trade deficit was the largest monthly deficit since last March. So much for the notion that the trade deficit has turned the proverbial corner.

One price explains it all: $96.81

That is the average price of US imported petrol in April.

It is about $30 a barrel above the average price for imported petrol in 2007

And it is about $30 a barrel below the current market price for petroleum. The deterioration in the US petroleum deficit isn’t over.

If the average price of imported petrol stabilizes at $125 a barrel (the US imports a fair amount of heavy crude so its average import price is below the market price for sweet light crude, the US petroleum import bill will rise from a bit under $320 billion in 2007 to around $520 billion in 2008.

Not good.

The petroleum deficit – over the last three months – already exceeds the non-petroleum deficit.

Read more »

The Wall Street Journal’s oped page writes that:

“the dollar plunge as translated into a net transfer in wealth from the US to the rest of the world”

I am not sure the rest of the world sees it that way.

A fall in the dollar reduces the wealth — when measured in their own currency — of all those in the rest of the world who have invested in the US. It thus arguably leads to a net transfer of wealth to the US.

The loans the US has taken out to finance its deficit are generally denominated in dollars. The fall in the dollar’s international value translates into a fall in their global purchasing power of America’s creditors. They will get paid back in depreciated dollars — reducing their wealth.

Wall Street firms have been keen to book falls in the market value of their debt as a rise in their net worth. The US, in theory, could do the same. The value of US external debt, denominated in say euros, as fallen – to the benefit of the debtor and detriment of the creditor.

The US would be in much different position if its external debts had been denominated in a foreign currency, say the euro. Then the dollar’s fall would have increased the real value of US external debt (in US terms), making the US – not its creditors – worse off.

Put a bit differently, the dollar’s fall (and euro’s rise) has increased the value of American investments in Europe, and reduced the value of Europe’s investments in the US. Mechanically, the capital gains on US investment abroad have offset much of the rise in total external US debt held abroad, limiting the deterioration in the United States net international investment position (see this spreadsheet, especially the columns marked price and exchange rates changes; a positive number is good for the US).

The dollar’s big fall in 2007 – together with relatively poor performance of US equity markets (in 07) – will combine to keep the US net international investment position from deteriorating when the US releases the relevant data later this month. The rise in value of US assets abroad, expressed in dollars, will exceed the rise in the value of US debts held abroad. Or, from the perspective of an external creditor of the US, the fall in the euro (or another currency) value of US debt offset the rise in the stock of debt ….

Read more »