Economic Imbalances

Readers Question: How can the recession correct global economic imbalances?

I wrote an essay on the global economic imbalances recently

To summarise one of the main global economic imbalances include:

• High Saving in East – High Consumption in West
• Current account surplus in East – Current account deficit US and (UK)

Some argue this glut of savings from Asia exacerbated the demand for risky mortgages and mortgage bundles.

The Recession is Having the following effect.

• Lower spending in US and UK. Both UK and US had very low saving rates at the end of the boom. Recessions tend to encourage people to save. On the other hand, China may be forced to encourage domestic consumption. They can no longer just rely on exports to maintain high growth rates. With external demand falling, there is greater pressure on them to boost domestic spending to take the slack.
• Lower Current account deficit. The US current account deficit has fallen from a peak of about 6.5% of GDP to about 3.3% of GDP This reflects the decline in US imports.
• Change in Attitudes. After the boom years, people in US are more suspicious of spending on credit. In the medium term or long term, we may see US consumers becoming more frugal and more willing to save. This will help to reduce the global saving imbalances between East and West.

(This is just a summary, there are more issues at stake here.)

See also: reducing economic imbalances