|Current account||Background. The US current account deficit narrowed from 6 percent of GDP prior to the crisis to around 3 percent of GDP during 2009–12 due to higher private saving and lower private investment (and was -3.8 percent of GDP cyclically adjusted). It is projected to worsen modestly as the output gap closes.|
Assessment. Model estimates suggest that the cyclically-adjusted current account deficit is½–1½ percentage points of GDP weaker than the value implied by medium-term fundamentals and desirable policies
|The US external position is moderately weaker than implied by medium-term fundamentals and desirable policies.|
Potential policy responses
Over the medium term, fiscal consolidation should aim for a general government primary surplus of about 1 percent of GDP (corresponding to a federal government primary surplus of 1¾ percent, higher than the 1 percent surplus envisaged in the President’s budget and staff’s projection of a very small deficit). This, together with some depreciation of the dollar would be consistent with maintaining external stability and full employment.
|Real exchange rate||Background. The dollar appreciated in real effective terms by some 2½ percent over the summer of 2012, with an increase in global risk aversion, and subsequently depreciated by a similar amount as market confidence returned. It is currently over 10 percent below its average value over the past 2-4 decades.|
Assessment. Estimates relying on current account assessments suggest a mild overvaluation given underlying fundamentals and desirable policies. The range of direct estimates of equilibrium real exchange rates is instead centered around zero, reflecting primarily the dollar’s current weakness relative to a long-run average. On balance, staff assesses that a further depreciation of the dollar in the range of 0–10 percent would be associated with a level of the dollar and a current account balance broadly consistent with medium-term fundamentals and desirable policies.
|Capital and financial accounts: flows and measures||Background. Both inflows and outflows are substantially lower than the levels observed prior to the Lehman crisis (including US portfolio investment overseas, despite record-low US interest rates). The US dollar reserve currency status and safe haven motives boost foreign demand for US Treasury securities during periods of market turbulence even as US overseas investments fall. Hence the outlook for capital flows in the United States will depend on global financial stability and the pace of the global recovery, as well as on the outlook for the US economy and its public finances.|
Assessment. The United States has a fully open capital account. Vulnerabilities are limited by the dollar’s status as a reserve currency and the United States’ role as a safe haven.
|FX intervention and reserves||Assessment. The dollar has the status of a global reserve currency. Reserves held by the U.S. are typically low relative to standard metrics, but the currency is free floating.|
|Foreign asset and liability position||Background. The net IIP declined from -17 percent of GDP in 2010 to an estimated -28 percent of GDP in 2012, and would deteriorate further under staff’s baseline scenario, suggesting some overvaluation. Still, given the large external imbalances of the last decade, the decline in the international investment position has been modest as the falling dollar and rising overseas equity prices raised the value of US assets overseas.|
Assessment. Risks to external stability could come from a decline in foreign demand for US debt securities (the bulk of US external liabilities), driven for example by a protracted failure to restore long-run fiscal sustainability. Still, given the dollar’s reserve currency status, current vulnerabilities are limited. Most US foreign assets are denominated in foreign currency; over 50 percent are in the form of FDI and portfolio equity claims and hence tend to decline in value in periods of global growth and stock market weakness, as well as US dollar appreciation.