This article, the second in an annual series, examines the factors shaping developments in trade, current and capital account flows in 1990 and early 1991. The Gulf crisis and the subsequent rise in oil prices in the second half of 1990 exacerbated recessionary tendencies in several industrial economies which in turn slowed trade growth. Domestic demand developments in the G3 worked to reduce current imbalances, while exchange rate movements improved the competitiveness of the United States and Japan at the expense of Europe.
Current account imbalances were largely matched by private sector capital flows with only modest official intervention occurring. There was however some turbulence in financial markets, particularly in the Japanese bond and equity markets, and the activities of international banks underwent changes as a result of pressures on banks' capital and widespread credit downgrading. These developments caused volatility in capital flows during the course of 1990, particularly in Japan and the United States.
Some highlights were:
- The US current account deficit fell again in 1990, reaching 1.7% of GNP against 2.0% in 1989, as US domestic demand growth slowed further.
- The Japanese surplus showed another sharp decline in 1990 to 1.2% of GNP against 2.0% in 1989 as the pace of domestic demand growth quickened slightly.
- German political and monetary union buoyed German domestic demand which in turn contributed to a reduction in the German current account surplus to 3.2% of GNP, compared with 4.8% in 1989.
- In 1990 the deutschemark strengthened and the dollar weakened on the international exchanges, reversing the pattern of the previous year. The yen continued to fall both against the dollar and on an effective basis.
- Activity in the international capital markets was broadly unchanged in 1990. International bank lending fell back while gross international direct investment flows continued to increase.