Ekholm: Do global imbalances pose a risk to the Swedish economy?
On Monday, Deputy Governor Karolina Ekholm made a speech at the Stockholm Chamber of Commerce on the risks that global imbalances pose to the Swedish economy. There is currently a widely-held view that global imbalances expressed in the form of large and persistent current account surpluses and deficits make the global economy vulnerable, and that they should therefore be reduced. Ms Ekholm said that although it may be underlying imbalances in the economy that give rise to deficits and surpluses, we should not set targets for how large these deficits and surpluses should be. They 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. According to Ms Ekholm, it is instead primarily a consequence of a relatively high, but justified, level of saving. She said that there are thus 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.
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 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. There is still a risk of a rapid correction of the global imbalances. Ms Ekholm said that this could lead to major problems for the global economy, which has hardly recovered yet from the crisis that we have just experienced.
Read the speech in full in the PDF below.
