US current account trade deficit hits new high

THE US deficit in the broadest measure of international trade rose to an all-time high of $195.1 billion (€159.3bn) from January through March of this year as the country sank deeper into debt to Japan, China and other nations.

The US Commerce Department reported on Friday that the deficit in the current account rose by 3.6% from the previous quarterly record, an imbalance of $188.4bn in the final three months of 2004.

The current account deficit has risen to record heights in recent years as America’s demand for foreign goods and services has soared, raising worries about the country’s ability to continue financing its trade deficit.

The current account deficit for all of 2004 hit a record $668.1bn (€543.7bn), up a sharp 28.6% from the previous 2003 record of $519.7bn (€423.0bn).

The current account is the broadest measure of foreign trade because it covers not only trade in goods and services but also foreign aid and investment flows between nations.

The US deficit must be financed by foreigners agreeing to hold more in dollar-denominated investments, something that so far they have been quite happy to do as they sell Americans more and more consumer products.

However, economists worry that at some point foreigners may lose their enthusiasm for dollar-denominated investments and begin dumping their holdings in US stocks and bonds.

Such a development could cause interest rates in the United States to soar and push the value of the dollar and stocks down sharply. If the reaction was severe enough, it could push the country into a recession.

Federal Reserve chairman Alan Greenspan has called the current account levels unsustainable but he also has said that market forces should be able to deal with the problem in a way that will not seriously disrupt the US economy.

The rise in the current account deficit for the first quarter meant that the deficit now represents 6.4% of the total US economy, also a record.

The deterioration in the first quarter deficit reflected an increase of $4.15bn (€3.38bn) in the deficit in goods, which rose to $186.3bn (€151.6bn). This was offset slightly by an increase of $1.62bn (€1.32bn) in the surplus in services, which rose to $14.57bn (€11.86bn) in the first quarter.

The surplus on investment flows increased by $541 million (€440m) to $3.78bn (€3.08bn) but the deficit in unilateral transfers, a category that includes foreign aid, increased by $4.7bn (€3.8bn) to $27.07bn (€22.02bn).