What Is a Current Account Surplus?
A current account surplus is a positive current account balance, indicating that a nation is a net lender to the rest of the world.
A current account surplus can be contrasted with a current account deficit.
- Current account surpluses refer to positive current account balances, meaning that a country has more exports than imports of goods and services.
- Countries with consistent current account surpluses face upward pressure on their currency.
- Current account surpluses can also indicate low domestic demand or may be the result of a drop in imports due to a recession.
Understanding Current Account Surplus
The current account measures a country's imports and exports of goods and services over a defined period of time, in addition to earnings from cross-border investments, and transfer payments. Exports, earnings on investments abroad, and incoming transfer payments (aid and remittances) are recorded as credits; imports, foreign investors' earnings on investments in the country, and outgoing transfer payments are recorded as debits.
When credits exceed debits, the country enjoys a current account surplus, meaning that the rest of the world is in effect borrowing from it. A current account surplus increases a nation's net assets by the amount of the surplus.
Because the trade balance generally has the largest impact on the current account balance, nations with large and consistent current account surpluses tend to be exporters of manufactured products or energy. Manufactured product exporters generally follow a policy of mass-market production—like China—or have a reputation for top quality, like Germany, Japan, and Switzerland.
Current Account Surplus Across the World
In 2020, according to the World Bank, the ten countries with the largest current account surpluses as a percentage of GDP were China, Germany, Japan, South Korea, the Netherlands, Italy, Singapore, Russia, Australia, and Kuwait. These current account surpluses finance current account deficits in other nations. The U.S. has the largest deficit by far.
A nation with consistent current account surpluses may face upward pressure on its currency. Such nations may take steps to stem the appreciation of their currencies in order to maintain their export competitiveness. Japan, for instance, has frequently intervened in the foreign exchange market when the yen rises by buying large amounts of dollars in exchange for yen.
Current Account Surplus as a Negative Indicator
Current account surpluses are generally considered a positive sign in an economy. However, in some cases, they are also negative indicators. For example, Japan's current account surplus is as much due to low domestic demand as due to its competitiveness in exports. The low domestic demand has translated to stagflation in its economy and low wage growth. Current account surpluses can also be the effect of a recession, when domestic demand dips and imports are curbed if a currency is depreciated.