Rebalancing global demand

The article examines to what extent the recovery of the global economy could gain support from a more balanced growth of global demand than in the past. Despite the gradual recovery of the global economy, it remains highly uncertain when – or even whether – growth can return to the often very vigorous pace prevailing before the crisis, especially as that dynamism was in many countries largely based on macroeconomic distortions which were most clearly apparent in the growing current account surpluses and deficits on the balance of payments, as is evident from our analysis of the figures from 1995 onwards. At the Pittsburgh summit in September 2009, in the Framework for Strong, Sustainable, and Balanced Growth the G20 leaders agreed that deficit countries should support private savings and strive towards fiscal consolidation. They will not only need to modify their spending patterns but will also have to transfer their focus to the export sector. To offset the shortfall in demand from these deficit countries, the surplus countries are called upon to reduce their dependence on exports and tap domestic sources of growth. The authors examine the actual policy implications of this for the US, China and the euro area. Although a number of countries have already adopted a range of policy measures which are a move in the right direction, restoring the balance of global demand remains a major challenge, not least on account of the difficult-to-implement but no less essential structural reforms, or the time required to push those reforms through. It will be no easy task to restore the macroeconomic equilibrium, achieve a broad consensus and create the conditions for strong, sustainable and balanced growth, in line with the G20 aims. The movement towards a new global balance risks becoming a protracted process, with the possibility of a worldwide growth slowdown in the meantime.