Current Account Adjustments Well Under Way

March 24, 2009

The U.S. current account deficit narrowed to 3.7% of nominal GDP last calendar quarter from 5.0% of GDP in the first three quarters of 2008  and 5.3% of GDP in 2007.  Japan’s seasonally adjusted current account surplus amounted to 1.2% of GDP in the three months to January, down from 3.2% in 2008 and 4.8% in 2007.

Today was Euroland’s turn to release current account figures.  The euro area current account position has shifted from a EUR 17.3 billion surplus in the twelve months to January 2008 to a EUR 70.4 billion deficit in the twelve months to January 2009.  Merchandise trade accounted for 62% of that deterioration, and net investment income was responsible for most of the rest.  In seasonally adjusted terms, Euroland’s current account deficit widened progressively from EUR 56 billion at an annual rate in the three months to July 2008 to EUR 91 billion in the three months to October and EUR 144 billion in the three months to January 2009.  The latter pace equaled 1.6% of GDP.

Reduced external imbalances mean that a smaller U.S. net capital inflow should suffice to support the dollar.  The current ten-year Treasury-German bund spread of minus 42 basis points is half of that differential’s end-2008 width (-83 basis points) but similar to the average width of minus 36 basis points last year.  The ten-year U.S.-Japanese bond spread has declined form 251 basis points on average in 2008 to 178 basis points at the end of last year and 142 basis points now.  Since the end of 2008, the dollar has risen 8.4% against the yen and 3.0% relative to the yen, and the U.S. currency is 14.6% stronger against the euro but 2.2% weaker versus the yen than it was exactly one year ago.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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