The US current account deficit could continue to grow over the next five years. However, to reverse the deficit by 2012, a massive dollar depreciation would be required.
Economists have been sounding alarm bells about the current account deficit since the late 1990s, arguing a major correction involving significant dollar depreciation looms.
This prompted MGI to consider the US current account deficit under two very different scenarios over the next five years: The deficit continuing to expand; and the current account coming into balance. On one hand, could the world fund an ever-growing US deficit? On the other, if the deficit were eliminated, what would be the impact on the value of the dollar and on US trade patterns? A number of surprising results emerge that challenge conventional wisdom.
MGI found there is nothing inevitable about a correction in the US current account deficit over the next five years. Indeed, it could continue to grow, and the world would still have enough capital to fund it. At current exchange rates, the United States could trim the deficit slightly by increasing service and manufacturing exports—but not enough to reverse its current trajectory. If a large dollar depreciation were to occur, MGI believes it would more likely be gradual than sudden. Nonetheless, the analysis illustrates how a very large and rapid dollar depreciation could bring the deficit back towards balance with significantly altered trade patterns. Under all depreciation scenarios, the United States would continue to run a large bilateral trade deficit with China.
Irrespective of whether the adjustment process is gradual or rapid, however, business leaders and policy makers should start considering what a post-devaluation world would mean for them.