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Global imbalances

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The IMF World Economic Outlook notes that the desired process of rebalancing global demand from countries with large trade deficits (notably the U.S.) to countries with large trade surpluses (notably China) is not going very well.

Relatedly, it points out just how difficult it is for increased demand in developing economies to offset stagnant or falling demand in the much slower growing advanced economies.

At pages 29-30, the report notes that the advanced economies -- North America, most of Europe, Japan -- now count for about 50 per cent of global demand, measured in GDP at purchasing power parity. However, if one looks at consumption measured at current exchange rates in terms of U.S. dollars -- which they argue is the relevant metric for looking at needed trade re-balancing -- the advanced economies still account for about 70 per cent of global demand.

Following this line of thought, it is estimated that consumption in China would have had to have increased by 17 per cent in 2009 to offset the impact on world demand of the fall in U.S. consumption compared to pre-recession levels.

In short, part of the reason that the global economy is slowing so alarmingly is that the positive impact of emerging country growth on global demand is not sufficient to offset the impact of consumption stagnation in the advanced economies.

Put even more succinctly, if growth cannot be revived in the U.S., Europe and Japan, the world is in deep doo doo.

This article was first posted on The Progressive Economics Forum.

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