Karolina Ekholm: Do global imbalances pose a risk to the Swedish
economy?
Speech by Ms Karolina Ekholm, Deputy Governor of the Sveriges Riksbank, at the
Stockholm Chamber of Commerce, Stockholm, 13 June 2011.
* * *
The views expressed in this speech are my own and are not necessarily shared by the other members of the
Riksbank's Executive Board or the staff of the Riksbank. I would like to thank Hanna Armelius for all her help in
writing this speech.
Financial crises often come as a surprise. After the event, however, it may be a simple
matter to look back and see all the flashing warning lights that should have signalled that
things were about to go seriously wrong. I do not think many people realised how vulnerable
the global financial system really was before the latest crisis, and consequently this crisis
came as a surprise too. However, there were people who did see warning lights flashing. The
problem was that they appeared to be flashing for a different type of crisis than the one that
eventually arrived.
What we expected to arrive was an international crisis triggered by a collapse in the real
value of the dollar.1 The warning lights began flashing due to the major global imbalances
arising from the fact that that some countries, above all the United States, had substantial
and persistent current account deficits while others, for example China, had substantial and
persistent current account surpluses. It appeared probable that the dollar would depreciate
as it was difficult to believe that the United States would be able to maintain its deficit
indefinitely,2 and the real exchange rate normally weakens when a current account deficit
needs to be corrected. And the dollar's status as a reserve currency throughout the world
made the entire global economy sensitive to rapid changes in the dollar rate.
Although a dollar crisis did not occur, the analysis was reasonable. Substantial and
persistent current account surpluses or deficits may be a sign of an underlying weakness or
imbalance in the economy. Even though global imbalances have subsequently declined, this
is due more to cyclical factors than to structural factors. They have also increased again
recently in pace with the recovery of the global economy. The International Monetary Fund
(IMF) continues to monitor the development of global imbalances and says that an
adjustment of these imbalances is necessary if the recovery is to rest on stable foundations.3
The association of developed countries and emerging economies that goes under the name
G20 has therefore decided to perform thorough analyses when surpluses or deficits become
substantial, in order to determine whether the country concerned should take measures. In
the risk survey conducted by the Riksbank in May this year, in which participants on the
Swedish fixed-income and foreign-exchange markets were asked to assess the risks to the
Swedish financial system, global imbalances were seen as the greatest risk.
Today I intend to present my view of the global imbalances and their significance to the
Swedish economy.4 There is currently a widely-held view that the large current account
surpluses and deficits make the global economy vulnerable, and that they should therefore
be reduced. A move towards reduced surpluses and deficits could affect the Swedish
economy in a way that has significance for monetary policy. Although it may be underlying
imbalances that give rise to deficits and surpluses, we should not, in my view, set targets for
how large these deficits and surpluses should be. Surpluses and deficits are to a certain
extent a natural result of the different conditions in different countries and important
mechanisms for redistributing capital in a way that makes the global economy more effective.
Sweden, for example, has had a relatively large current account surplus for 15 years. It is
currently larger than China's, calculated as a percentage of GDP. However, there is nothing
to suggest that this surplus is the result of underlying imbalances in the Swedish economy. In
the first instance, it is rather the consequence of a relatively high, but justified, level of
saving. There are therefore, in my view, no strong reasons to expect this surplus to become
a deficit within the near future - something which would typically happen through a
strengthening of the real exchange rate. In my opinion, the current account surplus is thus
not in itself an indication of a stronger krona.
What are the global imbalances and why have they arisen?
When we speak about global imbalances we usually mean a situation in which deficits and
surpluses in the current accounts of different countries appear to be unsustainable in the
long term.5 A surplus means that the value of a country's total output exceeds the value of
the country's total consumption. In the same way as a household whose income exceeds its
expenditure will save the difference, a current account surplus constitutes a form of saving
for a country. In effect, the current account reflects the difference between total saving in the
country and domestic investment. A countries income, which consists of the value of the
goods and services produced there, can be used for consumption or for saving. Saving can
in turn be used for domestic investment and for investment abroad. If total saving is higher
than domestic investment, some of the saving must be invested in foreign assets and thus
used for investment abroad. If, on the other hand, total saving is not sufficient to cover
domestic investment, the county will have to borrow from other countries (from private or
public sources). This means that countries with a current account surplus can invest in or
lend to others, while countries with a deficit borrow from abroad.
In theory, capital should flow from more developed countries to emerging economies, as the
return on capital should be higher there. This is also largely what we saw in Europe before
the crisis - countries in southern and eastern Europe had current account deficits, while
countries like Germany and Sweden had surpluses. Figure 1 shows current accounts, private
net capital and GDP growth for eastern and central Europe. Many of these relatively
rapidlygrowing countries experienced a rapid expansion of credit, which contributed to the build-up
of substantial current account deficits in the years before the crisis.6 These countries then
experienced steep falls in GDP during the crisis, which raises some doubts about whether
the capital flows were really motivated by high returns. At the global level, however, there are
many cases where less-developed countries, such as China, are lending to developed
countries, such as the United States and the United Kingdom.
Current accounts, private net capital
and GDP in eastern and central Europe
Percentage of GDP and annual percentage change
15 15
GDP
Current account
Private capital
10 10
5 5
0 0
-5 -5
-10 -10
80 82 84 86 89 91 93 95 97 99 01 04 06 08 10
Note. Private capital is made up of direct private investment (net), private portfolio flows (net) and other
private capital (net flows), expressed here as a share of GDP.
Source: The IMF
Global imbalances have increased since the deregulation of the capital markets at the end of
the 1980s. One of the reasons for this is that countries with surpluses, such as China, have
grown more rapidly than other countries. The higher rate of growth means that China's
savings surplus (the difference between saving and investment) has increased as a
percentage of global GDP. As the current accounts in the world must in theory total zero, this
means that other countries must have increasing deficits to a corresponding degree.7 On the
deficit side, the Unites States stands out in that it alone has accounted for three-quarters of
the world's total current account deficit. The United States has also been in deficit for a very
long time, as much as 20 years. The countries that have a surplus, and that in practice thus
lend money to the United States and other countries with deficits, have primarily been a
number of oil-producing countries and China, but also include Japan, Germany and some
other Asian countries (see Figure 2).
Current accounts around the world
Percentage of global GDP
3 3
USA
Oil exporters
Germany and Japan
2 OCADC 2
China and Emerging Asia
Rest of the World
Discrepancy
1 1
0 0
-1 -1
-2 -2
-3 -3
96 98 00 02 04 06 08 10 12 14
Note. OCADC comprises Bulgaria, Croatia, Czech Republic, Rumania, Hungary, Ireland, Lithuania, Poland,
Portugal, Estonia, Greece Spain, Turkey and the United Kingdom.
Source: IMF WEO April 2011
Current account surpluses or deficits are not bad in themselves and do not necessarily entail
an unsustainable imbalance in the long term. In a globalised world they are a natural
consequence of the different conditions in different countries in terms of factors such as
demography, the degree of development and natural assets. A surplus may be justified by a
country's need to have a high level of domestic saving - for example due to an ageing
population - but also means that consumption will be held back, thus reducing the demand
for other countries' exports. However, some underlying problems, such as a too low level of
saving linked to a too optimistic view of the future, may be reflected in a weakening of the
current account. This can also contribute to generally low interest rates which, in combination
with other factors such as shortcomings in the supervision of the financial sector, generate
the potential for a financial crisis of the type we have just experienced.
The factors that above all led the imbalances to grow in the years before the crisis were
above all increased saving in the public sector and the corporate sector in China, together
with increased saving in the oil-producing countries. Investment, on the other hand, remained
at approximately the same level as previously.8 It appears that the increase in saving exerted
a worldwide downward pressure on long-term interest rates, which may have led investors to
turn to higher-risk assets in the hunt for higher yields. In the United States, however, saving
was low and investment was high partly because of the low interest rates. The low interest
rates also stimulated the housing market which, in combination with decades of an
expansionary housing policy, led to the build-up of a bubble that eventually burst. Many
observers therefore believe that the global imbalances were one of the causes of the
financial crisis.9
There are better and worse reasons for current account surpluses and deficits
In the 1970s and 1980s, large current account surpluses or deficits were generally regarded
as something negative. This period was marked by fixed exchange rates and by the
regulation of capital flows across national borders. A deficit was often seen as a sign of an
approaching devaluation. However, after the capital markets were deregulated and the
exchange rates began to float to a greater extent, the view became more positive. It was
assumed that changes in the current accounts reflected an optimal redistribution of the
freely-moving capital. In the 2000s, however, we began to hear warnings that, above all, a
rapid correction of the imbalances could have serious consequences for the value of the
dollar, resulting in rising long-term interest rates, recession and a possible financial crisis.10
The fact that capital flowed from emerging economies with great growth potential to the
United States - where it was apparently used to a large extent to finance investment in
housing - indicated that this was not a case of capital seeking a higher marginal return but
rather of an excessive provision of credit.
At the same time as the US households became increasingly indebted, major currency
reserves were built in, for example, China. It was at this time that Ben Bernanke spoke about
a "global saving glut".11 There were, however, good reasons why the level of saving was high
in many Asian countries. Following the crisis in Asia in the early 1990s, the countries wanted
to build up currency reserves to protect themselves against future stoppages in capital flows.
Research indicates that countries that had reduced their vulnerability in this way were also hit
less hard by the latest crisis.12 Furthermore, there were, and still are, weaknesses in the
social safety nets of several of these countries which mean that households have to save in
order, for example, to be able to afford medical costs in the future. China also has an ageing
population as a result of the one-child policy, which may also justify a high level of saving.
There have been claims from the United States, however, that the substantial current
account surplus is largely due to the fact that China's currency is undervalued and thus
indirectly favours Chinese exports and production that competes with imports. Other factors
that may have contributed to the surplus is that the financial market in the United States is
more highly developed than in many Asian countries, which has made it advantageous to
invest savings there rather than in the domestic economy, and that companies in China pay
out a relatively small part of the profits in dividends, which probably helps to boost saving but
restrict consumption.13
Global imbalances and capital flows after the crisis
The crisis that actually arrived took an entirely different course than many expected.
Although the United States was hit hard, the dollar was actually strengthened initially
because investors fled from risk and US government securities were seen as a safe asset.
The countries that had large current account deficits were, however, hit to a greater extent
than countries with surpluses by major falls in housing prices.14 This shows that current
account deficits were often a reflection of underlying weaknesses, for example unsound
lending practices and the build-up of debt.
However, the crisis itself and the subsequent recession reduced the imbalances, at least
temporarily. The savings ratio increased in the United States at the same time as domestic
demand increased more rapidly in China as a result of a fiscal policy stimulation package.
The substantial fall in oil prices also played a role. The question is, however, whether the
underlying causes of the imbalances have been corrected. The IMF believes that the
imbalances will remain in place in the period ahead (see Figure 2). The oil price has also
increased considerably during the last six months, which also indicates that the imbalances
will remain. This is because this boosts net exports in oil-exporting countries, which tend to
have current account surpluses, but increases costs for oil importers, who tend to have
current account deficits.
The G20 has pointed to the global imbalances as being an important factor for development
in the global economy. One aspect that has been discussed is whether to adjust the nominal
exchange rates in order to reduce the imbalances. If China, for example, maintains a fixed
exchange rate against the dollar, this will make it possible to adjust the real exchange rate if
China has a higher rate of inflation than the United States. However, this entails either a high
rate of inflation in China, which the Chinese authorities are not likely to want, or to deflation in
the United States, which the US authorities definitely do not want. In connection with the
outbreak of the crisis, China stopped the appreciation of the renminbi that had been going on
for several years and instead pegged the renminbi to the dollar until June last year. This
meant that China's currency followed the depreciation of the dollar that came when the worst
of the crisis was over and investors once again began to turn to higher-risk assets, for
example by investing in assets in the emerging economies (Figure 3).
China's nominal exchange rate against the dollar and real
and nominal effective exchange rate indices
USD/CNY and index 2005=100
10 90
Exchange rate USD/ CNY (left)
Real effective exchange rate (right)
Nominal effective exchange rate (right, inverted)
9 100
8 110
7 120
6 130
05 06 07 08 09 10 11
Note. The effective exchange rate index measures how the currency relates to a basket of other currencies
that are weighted in terms of their relative importance to trade. The real index is also adjusted for relative
differences in the CPI. A downward movement in the figure entails a strengthening of the exchange rate.
Source: Reuters EcoWin
This put some emerging economies with a floating exchange rate in an awkward position as
they did not want to lose too much competitiveness in relation to China while at the same
time large capital inflows tended to strengthen their exchange rates. The G20 has now
agreed that in certain situations it may be justified to introduce temporary capital regulations
to protect against volatile capital flows. The view is that in normal cases a country should use
monetary or fiscal policy, or tools for macro prudential supervision, but that in exceptional
cases it may be appropriate to introduce measures to control capital. Work is underway to
set up common guidelines.15
Why does Sweden have such a large current account surplus?
Prior to the crisis of the 1990s, it was usual for Sweden to have current account deficits for
long periods of time (see Figure 4). After the crisis the krona weakened substantially at the
same time as the deficit became a surplus. Since then, Sweden has not only had a surplus, it
has had a very substantial and, to a certain extent, a growing surplus.
Sweden's current account
Percentage of GDP
10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
-4 -4
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: The IMF
There are many possible explanations for the large surpluses. As I have already mentioned,
the current account surplus is due to the fact that domestic saving is higher than domestic
investment. In Sweden, household saving increased following the economic crisis in the early
1990s, which may partly be because the tax reforms implemented at that time made it much
more profitable for the households to save. The fiscal policy framework also led to an
increase in public sector net lending. The pension reform of 1994 was probably another
factor that contributed to the increase in household saving as future pension payments were
linked more strongly to how much was paid into the system. Sweden also has an ageing
population so one could claim that saving should be high to enable us to cope with
increasing pension costs in the future.16 But this applies to most of our trading partners too.
The age dependency ratio, that is the ratio between people of pensionable age and people of
working age, is expected to increase in Sweden from the current level of 30 per cent to
45 per cent by 2050. For Europe as a whole, however, the age dependency ratio is expected
to increase from 25 per cent to 52 per cent. At the same time, of all the countries in the
OECD only Norway, which is an oil exporter and Switzerland have larger current account
surpluses as a percentage of GDP than Sweden.17
The crisis of the 1990s perhaps meant that the Swedish public accepted the demand for a
consolidation of public finances in a different way than in other countries. In many cases,
these countries are being forced to conduct similar budget consolidation processes now
instead. If so, this suggests that the differences in saving compared to other countries will
decline in the long term, and thus also the Swedish current account surplus. Another
possible explanation for the high level of saving may be that the households underestimate
how much is saved in the public pension system following the reform of the system.18 If this
is the case, our level of saving could be unjustifiably high and could remain so for some time
to come. Figure 5 shows saving in different sectors in Sweden.
Figure 5
Finance balance in different sectors in Sweden
Percentage of GDP, current prices
10 10
5 5
0 0
-5 -5
Households
-10 -10
Public sector
Companies
-15 -15
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Sources: Statistics Sweden and the National Institute of Economic Research
It may also be the case that the explanation has more to do with investment. Sweden has
had a lower investment ratio than both the OECD and the EU averages since the 1990s. The
difference is almost entirely explained, however, by the fact that investment in housing has
been lower in Sweden (Figure 6). This has partly been an adjustment following the very high
level of investment in housing in the 1980s, but also probably relates to changes in the
regulation in connection with the tax reform of 1991 and the fact that a new housing finance
system was introduced in 1993.19 It is difficult to assess whether the level of investment in
Sweden can be regarded as having being unjustifiably low during the period in which the
current account surplus has grown. Above all it is difficult to find any kind of reform that
would generally have been able to increase the return on Swedish investments in particular
and thus have led to a higher investment ratio.
Investment in the EU and Sweden
Percentage of GDP
24 24
22 22
20 20
18 18
16 16
14 14
Sweden - total
Sweden -excluding housing
12 12
EU -total
EU -excluding housing
10 10
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Statistics Sweden
After the fixed exchange rate regime was abandoned in 1992, the krona depreciated by
almost 30 per cent in trade-weighted terms. The krona has in principle not recovered from
this weakening, although it has strengthened significantly recently. According to various
statistical methods, there has been no clear trend for the real exchange rate since the
mid1990s (see Figure 7), which may indicate that the long-term value of the krona is close to the
average during this period.20 The period with large current account surpluses can thus not be
associated with any tendency towards a real strengthening of the krona.
Real and nominal exchange rate, TCW index
Index, 18 November 1992=100
24 24
22 22
20 20
18 18
16 16
14 14
Sweden - total
Sweden -excluding housing
12 12
EU -total
EU -excluding housing
10 10
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: The Riksbank
In this context it is worth noting that Sweden, despite so many years with a large current
account surplus, is estimated to have a negative net external position.21 In other words, the
value of Swedish assets abroad is lower than the total value of Swedish liabilities abroad.
Last year, Swedish liabilities abroad were 2.5 times greater than GDP. The fact that stocks
on both the asset and liability sides are large means that variations in the value of these
stocks are important to the development of the external position. The current account on the
other hand, which constitutes a flow that adds to or subtracts from these stocks, is less
important.22 Changes in the valuation of the assets and liabilities are affected to a great
extent by changes in the exchange rate.23 There are, however, considerable shortcomings in
the statistics in this area. The values of some types of asset are definitely underestimated, as
there is a lack of statistics on the Swedish households' direct investments abroad. The net
position can also be measured in different ways depending on whether direct investments
are accounted at market value or at book or nominal value. However, both methods give a
net position that is much lower than that given by the accumulated current account surplus
(see Figure 8).
Sweden's net external position and accumulated current accounts
Percentage of GDP
80 80
Accumulated current
accounts
Net external position
60 60
Nominal net external
position
40 40
20 20
0 0
-20 -20
-40 -40
-60 -60
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Sources: Statistics Sweden and the Riksbank
If it is the case that Sweden has no particularly large net claim internationally then this will
have some significance for the prospects for the real exchange rate. In theory, countries with
a strong external position should in the long term experience appreciating real exchange
rates, and vice versa. There is also empirical support for the link between the net position
and real exchange rates when studying different countries.24 With a net claim close to zero
one would not necessarily expect any strengthening of the real exchange rate despite a large
current account surplus. The fact that Sweden's external position appears to be close to zero
suggests that there is no need for the real exchange rate for the krona to move in any
particular direction for this reason. Other factors also affect the real exchange rate, for
example relative GDP growth, relative inflation and the terms of trade. In our latest forecasts,
however, none of these factors has suggested that there will be any significant changes in
the exchange rate for the krona in the period ahead.25
The krona does not need to be strengthened, but Sweden is still affected by the global
imbalances
Despite the fact that Sweden has had a substantial current account surplus for 15 years
there is nothing to suggest that this surplus must become a deficit within the near future to
prevent Sweden from accumulating a large net claim in relation to the rest of the world. Nor
is there anything to suggest that the Swedish krona should appreciate in real terms to enable
a shift in the current account from a surplus to a deficit. As Sweden, as far as we can see,
does not have any significant positive net external position, there is nothing to say that the
real exchange rate needs to be strengthened for reasons relating to the net position.
A general reduction in the global imbalances could, however, have consequences for
Sweden. Apart from the fact that this would reduce the risk of a new international crisis, it
would mean that a larger part of global demand would come from those countries that
currently have a surplus, for example China, and a smaller part from the United States. It is
difficult to know, however, what impact this would have on the demand for Swedish export
goods. To the extent that Chinese households and companies demand different types of
goods than households and companies in the United States, this largely depends on whether
Swedish companies are flexible enough to adapt their production to meet changes in the
pattern of demand. The Asian countries that have surpluses are a long way from Sweden
and geo-graphical distance is a factor that has a clear negative link to the propensity of
countries to trade with each other.26 However, there are countries with substantial surpluses
that are close to Sweden, for example Germany. It is therefore not obvious what the overall
impact would be on the demand for Swedish exports if there was a general reduction in
current account surpluses and deficits. It is also conceivable that the United States would
import more investment goods if its current account deficit decreased, as this would probably
entail an expansion of the export-oriented industrial sector at the expense of the more
domestically-oriented service sector. This in turn would entail an increased demand for the
type of industrial goods that Sweden exports quite a lot of.
Reduced global imbalances could also entail rising long-term interest rates globally when the
Asian countries with surpluses cut back their purchases of US government securities. This
would probably also entail a weaker real exchange rate for the dollar. However, it is difficult
to assess the consequences of this for the Swedish economy.
There will always be current account surpluses and deficits as conditions differ from country
to country. The fact that capital flows to rapidly-developing economies, where the return on
capital is relatively high, also entails a redistribution of capital that makes the global economy
more effective. Therefore, in my view, we should not set targets for the size of current
account surpluses or deficits. Sweden can be seen as an example of the fact that a large
surplus is not necessarily an expression of an underlying imbalance in the economy.
However, significant deviations in the current account may be a sign that something is not
quite right in the economy. They can also interact with other weaknesses, for example
weaknesses in the financial system, as was the case before the financial crisis. It is therefore
important to continue monitoring the development of global imbalances and to understand
what lies behind major deviations. Although considerable improvements in the regulation of
the financial markets are underway, there is always a risk that new weakness will develop
that we do not see until it is too late. Moreover, the fact that the crisis that arrived at the end
of the 2000s was not the one that was expected does not mean that the expected crisis will
not arrive at all. There is still a risk of a rapid correction of the global imbalances. This could
lead to major problems for the global economy, which has hardly recovered yet from the
crisis that we have just experienced.
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