IMF surveillance of the United States

The IMF agonizes over how to make its surveillance more effective -- and how to get countries to listen to its advice. That is particularly true for large, powerful countries like the US and China. Yet if the IMF is going to be relevant in a world where the US and China anchor the an imbalanced world -- the US achoring the "savings deficit" side of the ledger, and China anchoring the "consumption deficit side of the ledger (a savings deficit creates a consumption surplus, and a consumption deficit is a savings glut) -- its advice has to be heard in large, powerful countries, not just countries that might turn to the IMF for financing.

The IMF wrapped up its 2005 consultations with the US a couple of weeks ago. That is only the beginning -- the IMF now will write up its conclusions, and present them to the IMF’s Executive Board.

I have one simple suggestion for how to give the IMF’s advice more punch: stop forecasting away the bad stuff.

Look at the staff report of the United States 2004 Article IV consultation (issued last summer). Specifically, look at Table 1, page 8, where the IMF forecasts the US current account deficit.

Somehow the IMF forecast the deficit to peak in q1 of 2004 at around 5.1% of US GDP, decline to 4.5% of GDP in q4 of 2004, and fall to 4.4-4.3% of GDP in 2005 ($550 b). The actual current account deficit in q4 2004 was 6.3% of GDP. The 2005 deficit is likely to be a bit larger than 6.5% of GDP. If oil stays close to $58 a barrel, I suspect the 2005 current deficit will prove to closer to $850 billion than $750 billion. The trade deficit alone would be $720 b if it averages $60 b a month -- and the US is not far from that right now.

Add in significant Transfer payments and, i expect, net interest payments, and the current account balance will easily be $100 billion larger than the trade deficit. The current account deficit is certainly not going to be close to $550b. Forecasting problems away tends to reduce pressure to do something about them.

If the IMF forecasts a smaller 2006 current account deficit than its 2005 current account deficit, it needs to identify the reasons why -- afterall, looking at it from the trade side, import growth has to be much, much faster than export growth to keep the trade deficit from growing, and net interest on US external debt should rise -- adding to the overall deficit.

An aside -- where did the invisibles forecast in the 2004 IMF forecast come from? Services imports have been growing fast, and the combination of higher debt and rising interest rates on that debt usually leads invisibles to fall on the back of rising external interest payments ...