Global Imbalances Redux ?

Joe Biden’s fiscal stimulus is likely to trigger some envy in the rest of the world and particularly in Europe, especially when its impact will combine with the faster reopening of the US economy to deliver what could be a spectacular mid-year 2021. We think the chances of the EU emulating the US and rapidly upgrading the Recovery and Resilience Fund are slim though. Political complications abound for now, and assuming they can be resolved by this autumn, the likely post-reopening rebound will in any case reduce the appetite for another round. The best we can expect on this front is an acceleration of the already committed disbursements.

True, national governments could “take the matter in their own hands” but we don’t expect much beyond the extension of the emergency support schemes, which lack the confidence-boosting, attention-grabbing nature of the US package. Doubts about the quantum of support from the European Central Bank (ECB) beyond March 2022, as the debate between “absolutists” and “relativists” is getting rife at the central bank’s board, may make governments cautious about deteriorating further their debt trajectory.

Meanwhile, in emerging markets, the list of countries forced into a monetary tightening is getting longer, with Brazil and Russia joining Turkey. Their contribution to world demand in 2021 may be dampened as their capacity to spur domestic spending is being hampered. True, China continues to do well, but Beijing is cautious not to engage in “over-stimulus”. Between the Euro area’s difficulties with the pandemic and policy constraints becoming more apparent in EM, the US looks like quite isolated as a lone candidate for overheating this year.

This is consistent with the US current account deficit rising, and we have started seeing the “dollar bears” congregate around the notion of “twin deficit” to revive the “global imbalances” storyline and predict a depreciation of the US currency. Still, the sensitivity of the US current account to the cycle is significant but not spectacular. We think the growth and interest rate differentials will offset much of the concerns over the external position of the US and we remain confident in the strength of the dollar.