A deficit can come from strong spending on imports, an uncompetitive export sector or a strong currency; a surplus from the opposite.
High domestic incomes: when incomes rise, people buy more goods, including imports. Imports rise and the current account moves towards deficit.
Weak exports: if a country's firms have high costs or poor quality, their goods sell less abroad. Imports then take a larger share of sales at home. Prices rising faster than in other countries also make exports dearer.
A strong exchange rate makes exports dearer and imports cheaper, which also worsens the current account.
Surpluses come from the opposite. Firms make good products at low cost, people at home save a lot, the currency is weaker, or trading partners buy a lot. Countries that earn a lot from investments abroad may also have a surplus on primary income.
- Deficit causes
- High incomes and imports, low competitiveness, high inflation, strong currency.
- Surplus causes
- Competitive exports, high saving, weaker currency, strong foreign demand.
Worked example: Why Singapore runs a current account surplus
Singapore has had large current account surpluses for many years.
- Competitive exports: electronics, pharmaceuticals and financial services sell strongly abroad.
- High saving: Singapore residents save a large share of their income.
- Services: shipping, finance and tourism earn foreign currency.
- Result: inflows from exports and income exceed outflows for imports.
Watch out for this
A current account deficit always means the economy is weak.
A deficit can occur because incomes are rising fast and people buy more imports, or because firms import machines to invest. It is a concern mainly if it is large and lasting.
Check your understanding
Which is most likely to cause a current account deficit?
- Rapidly rising incomes leading to a surge in imports
- A fall in the exchange rate
- Strong growth in trading partners