Is The US Current Account Deficit Really Disappearing? [ANALYSIS]VW Staff
US Current Account Deficit – Decline in energy dependence
The United States really is reducing its energy dependence, with the oil balance in volume terms improving by USD 108 bn. between 2006 and 2012 (from -USD 266 bn. in 2006 to -USD 158 bn. in 2012, Chart 21).
First, the volume of oil exports (starting from a very low level) has grown substantially since 2006.
Second, the volume of oil products imported has fallen considerably, by 23% since 2006, although it remains very high (Charts 22 & 23). This decline in imports is explained by the rise in domestic oil production (Chart 24) and the reduction in oil consumption. The latter is linked to weaker growth and structural factors: improved energy efficiency; changing consumer patterns (e.g. smaller, more energy-efficient cars); substitution by other types of energy, etc.
The effect on the oil balance in value terms is less visible due to price effects: it continued to deteriorate between 2006 and 2012, by USD 20 bn. Since mid-2012, it has tended to improve as oil prices fall.
The oil balance should keep on improving over the coming years with the continued decline in energy dependence as shale gas and oil production increases2. However, there is still a substantial difference between the value of exports and imports (Chart 25), suggesting that several years are still needed before the gap is closed. As some uncertainty still remains (changes in oil prices, energy consumption, shale gas production and export capacity, etc.) this may substantially affect how quickly the oil deficit is reduced over the next few years. But according to estimates by the EIA (Energy Information Administration), the United States could become a net exporter of gas as early as the next decade.
Sharp decline in the current account deficit since 2006: using the borrowing requirements approach
Another means of assessing the changing current account deficit is to examine the borrowing requirement/financing capacity of the various economic agents.
The sharp decline in the current account deficit since 2006 is due to:
- the reduced borrowing requirement of households after the real-estate bubble burst. Households began reducing their debt and have gradually switched from a borrowing requirement to a financing capacity (Charts 26 & 27).
- After the 2008 crisis, the financing capacity of US companies improved substantially with the decline in investment, and private agents now have a total financing capacity of around 3.5 GDP points.
Meanwhile, in an effort to ease the impact of private sector deleveraging on growth, the public sector has increased its borrowing requirement substantially (stimulus) curbing the narrowing current account deficit.
The current account deficit today is due solely to the public borrowing requirement.
How might things develop for the various agents?
The borrowing requirement and financing capacity of the various agents should evolve substantially over the next few years.
- Household deleveraging is just about over and the financing capacity of households should continue to decline as lending gradually picks up.
- While we do not anticipate a sharp or sudden distortion in the distribution of value added, the profit rate and self-financing rate of companies remains high. While they may maintain a surplus capacity it will be less than in recent years (Chart 28).
- Meanwhile, the public sector deficit is likely to decline with the gradual consolidation of public finance. The public deficit will decline substantially in 2013 to 4% of GDP, versus 7% in 2012, and should then narrow at a more gradual pace (Chart 29).
The narrowing public deficit should generally cause the current account deficit to shrink, although the impact will be limited by the reduction in private sector surplus capacity.
Alongside cyclical effects, such as slower growth since the 2008 crisis, the narrowing current account deficit since 2006 has a number of structural origins: direct investment income abroad, increase in the services surplus and reduction in the goods deficit, partly associated with US companies recovering lost market shares and, more recently, an improving oil balance.
These trends should continue to prevail, suggesting a continued narrowing of the US current account deficit. However, we can expect no return to equilibrium in the US external accounts since the changes underway are long-term processes. The narrowing deficit could also be curbed as domestic demand takes off again, while world growth may remain weak for quite a long time. Maintaining a current account deficit, albeit small, also has the advantage of satisfying global demand for the dollar, ensuring that it remains the global international currency.