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 Business News | March 2006 
US Trade Deficit Soars to Record
 BBC News
| | The US current account, the broadest measure of trade and capital flows, widened to a new record deficit of 804.9 billion dollars in 2005. (AFP/Illustration) |
The US current account deficit, the nation's broadest measure of trade, reached a record high in 2005.
According to the Commerce Department, the shortfall, which includes trade figures as well as money flows, surged 20% to $804.9bn (£463bn) last year.
The deficit was 6.4% of the total value of the US economy, the worlds largest.
Analysts say that the imbalance in the current account may prompt problems, as investors try to limit their exposure to the US and a drop in asset values.
Chinese Deficit
While the US is posting steady and healthy economic growth, there is a worry that problems are being stored up.
Analysts have pointed to a bubble in the housing market, reluctance among consumers to spend, the threat of a weaker dollar and an inability to compete with lower-cost Asian manufacturers.
"The current account deficit has grown to a point where it arguably cannot be corrected by US action alone," said Michael Woolfolk, senior currency strategist at the Bank of New York.
Many US politicians blame the growing trade deficit with China for broader economic problems, arguing that China has deliberately suppressed the value of its currency to sell goods abroad cheaply.
Political Unease
Speaking on Tuesday, US Commerce Secretary Carlos Gutierrez said that if China did not take action on currency reform it would encourage those in the US seeking to put up "protectionist barriers".
Support for legislation which would slap tariffs of more than 25% on certain Chinese goods if Beijing does not further revalue the yuan is thought to be gaining support among sections of Congress.
Pressure is growing for China to act ahead of a visit by Chinese president Hu Jintao to the US next month.
"If our economic relationship is to stay afloat, China needs to lighten the load by carrying out reforms and delivering results," Mr. Gutierrez said.
US Deficit Data Fuel Anxieties on Dollar
Christopher Swann - The Financial Times
The US current account deficit suffered its fastest quarterly deterioration in the final months of last year, ballooning to a record 7 per cent of national income.
The worse-than-expected deficit rekindled fears among economists that global imbalances would undermine the dollar.
The deficit hit $225bn (€187bn, £129bn) in the fourth quarter, up from $185.4bn in the third, which was 5.9 per cent of gross domestic product. For 2005 the deficit was $805bn, 6.4 per cent of national income.
"The bottom line is that a current account deficit of this unparalleled magnitude is unsustainable and there is no hope of it being painlessly resolved through higher exports alone," said Paul Ashworth, an analyst at Capital Economics.
Total US exports are just 10.5 per cent of GDP. In order to eliminate the deficit, exports would need to increase by 70 per cent. "This is clearly not going to happen," said Mr. Ashworth. "Instead it will require a big dollar depreciation alongside much weaker domestic demand for imports."
The US current account position has long benefited from a positive income balance, with US investors receiving more from overseas assets than the country paid to foreign investors. In 2005, however, this started to turn round. In the fourth quarter the income balance was $2.4bn in deficit. Economists believe that this deficit will become ever larger as the impact of years of net selling US assets is felt.
So far the US has had little trouble funding the current account deficit, with overseas investors willing to buy ever greater quantities of US assets and Asian central banks buying US bonds to prevent their currencies from rising.
Since the start of 2006, the dollar has appreciated by about 3.5 per cent in trade-weighted terms.
Economists suspect that support for the dollar may start to ebb in 2006. Funding the deficit in 2005 was helped by the American Job Creation Act, which included a provision temporarily allowing US multinational companies to repatriate foreign profits at a lower tax rate.
The US also benefited from a rising interest rate gap against the eurozone and Japan. Neither of these boosts are likely to be present in 2005.
Economists are also concerned that money borrowed from overseas is being used for current spending by consumers rather than being funneled into corporate investment, which might enhance the ability of the US to pay back overseas money. US companies have become net savers while US consumers and the government are both borrowing heavily.
Aside from a fall in the dollar, the deficit could be narrowed if US consumers cut back over coming years. |
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