Recovery, war, and policy shocks
Global current account balances widened further in a third consecutive year in 2022.
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One prominent contributor to the widening in 2022 was Russia’s invasion of Ukraine, which elevated commodity prices amid supply concerns.
The uneven recovery from the COVID-19 pandemic—across countries and sectors—and the rapid tightening of US monetary policy also contributed to the widening of global balances, offsetting the impact from unwinding of pandemic-induced fiscal measures.
Concurrently, the US dollar appreciated substantially, and the uphill capital flow—capital flowing from faster-growing emerging market and developing economies (EMDEs) to slower-growing advanced economies—reappeared.
China’s reopening and the US banking sector turmoil were the new forces that could have important implications on global balances in early 2023.
The re-opening of the Chinese economy led to a temporary rebound in exports in the first quarter of 2023 as supply chain conditions improved, contributing to a widening of global trade balances.
The unexpected failures of two large regional banks in the United States and a systemically important global bank in Europe have had limited impact on cross border capital flows and currency volatility so far, owing to forceful policy actions undertaken to reassure markets and shore up the banking sector.
However, as banking sector turmoil has tightened credit conditions and curtailed lending, market participants now expect a shallower monetary policy path in the United States, which has provided some support to EMDE currencies.
The widening of global current account balances is expected to reverse in 2023, as the impacts of the pandemic and Russia’s war in Ukraine recede.
However, there is a high degree of uncertainty surrounding this outlook. Risks include a renewed increase incommodity prices and a slower-than-expected pace of China’s recovery or of fiscal consolidation in economies with current account deficits.
In addition, a severe tightening of global financial conditions could trigger broad-based capital out flows from vulnerable EMDEs, and further geo economic fragmentation could potentially lead to large welfare losses, including through its effects on trade barriers and foreign direct investment.
Recent developments
Elevated Commodity Prices and the War in Ukraine Commodity prices increased in 2022, enlarging the differences in current account balances between commodity importers and exporters.
In the aftermath of Russia’s invasion of Ukraine, commodity prices soared amid concerns about a shortfall in global supplies from Russia and Ukraine and trade disruptions caused by the war itself.
Oil prices then started falling from their peak in mid2022, as demand growth from major economies, such as China, slowed and trade diversion enabled a steady supply of Russian crude oil to the global market.
European gas prices had risen to a stratospheric level amid supply disruptions but declined, owing to substitution efforts and an exceptionally mild winter that reduced demand.
Food prices also began to fall around the same period as supply and demand reacted to higher prices, including through the reopening of the Black Sea corridor, increased wheat production in Europe and India, and lower demand for price-elastic items.
Despite the decline since mid-year, average commodity prices in 2022 were higher than those in 2021 and well above their pre-pandemic levels.