National Post (National Edition)
U.S. Senate gridlock threatens stimulus
The outcome of several U.S. Senate races could shape the size and timing of any post-election fiscal stimulus package and in turn impact the speed of Canada's own post-pandemic recovery.
Before the election, the Republican-led Senate had sought to block the House Democrats' plan to inject more than US$2 trillion in federal stimulus funds into the economy, pushing instead for a plan worth closer to US$500 billion.
Now, with the election campaign in the rearview mirror, the dynamics could shift but continued gridlock also remains a possibility.
“If we have a split Congress, we're probably looking at a much more modest stimulus package,” said Doug Porter, chief economist at BMO Capital Markets. “That means much less infrastructure spending, probably much less spending on green energy ... so there are fewer net direct benefits for Canada in this political environment.”
By Porter's analysis, a Republican-led Senate — a scenario he predicted — could be expected to approve a stimulus package worth an estimated US$500 billion to US$1 trillion. That amount could be sufficient for the U.S. economy to achieve four-per-cent growth in 2021, following a projected 3.6-per-cent economic contraction in 2020, Porter said.
The stakes could not be higher: Porter said his bank projects that the U.S. economy will contract by 3.6 per cent by the end of 2020. To regain some of those losses, he said his bank has calculated that the U.S. needs to pass at least US$500 billion in stimulus funds in order to achieve four-per-cent growth in its economy in 2021 — a situation that would still leave the economy smaller than it was at the end of 2019.
The prospect of a split government caught Porter off-guard after pre-election polls had suggested Democrats had a strong chance of netting at least four Senate seats in a socalled `blue wave' and taking control of the chamber.
“Yesterday, we were leaning towards possibly revising up our growth forecast for the U.S., based on the polls that were looking at a blue wave,” he said. “Now with the reality in front of us, we'd probably be biased to slightly revise it down.”
But Porter added that the situation remained fluid and there could even be upsides for Canada in a split government, he said.
If Joe Biden emerges victorious in the presidential race, for example, a Republican-led Senate could lead to negotiated compromises, including forcing Biden to move off his stated opposition to the Keystone XL pipeline. Any progress on the pipeline, which would carry crude oil from Western Canada into the U.S., could be a positive for Alberta.
Historically, a Republican-led Senate could be expected to be less protectionist on trade, and under the same scenario might work to ease the U.S. steel and aluminum trade tariffs — although it did not stop President Trump in this regard, Porter said.
On the other hand, Porter projected that a Democratic-led Senate could approve larger fiscal stimulus, perhaps in the US$2- to US$3-trillion range, with plans for major spending on roads and airports and also incentives to build a green energy economy, which could create opportunities for Canadian companies.
Opinions varied on what a Republican-led Senate would endorse in terms of stimulus.
Avery Shenfeld, chief economist at CIBC, wrote on Wednesday, that House Democrats may decide to “move in the direction of a smaller, but politically feasible bill,” but predicted it could be in the range of US$1 trillion to US$1.5 trillion. That would fall as the compromise point between the low-end, US$500 billion that Senate Republicans suggested before the election, and the high end US$3 trillion House Democrats floated, he said.
Shenfeld also suggested that with the campaign over, the dynamics in the U.S. Senate may shift, and Republican leadership may be more willing to allow a larger stimulus bill to come up for a vote.
“Although the final Senate results are not yet known, the Republicans' ability to retain a major influence in that body means that political change on other issues is also likely to be less decisive, even if the White House changes hands,” he wrote. “So those looking at the election as a turning point on climate change, energy sector policy, financial services regulations, taxation and other issues that have impacts on individual equities or other assets, can count on seeing less dramatic change, if indeed any changes are in the wind.”
He and others were quick to point out that the upshot of a split government remains highly speculative.
Tony Frost, a professor of strategy and economics at Western University's Ivey Business School, noted that when the Republicans controlled the Senate during president Obama's tenure, gridlock was the norm on all major policy issues, and a similar strategy could return for Biden if he captures the presidency.
“The paradigm in the Obama years in the Senate was just to say `no',” said Frost.
Keith Wade, chief economist at Schroders PLC, an asset manager, wrote that markets already had begun “to factor in a Democrat sweep and a significant stimulus bill,” and the likely growth it could have added to the U.S. economy.
If Trump retains the presidency, and Congress is divided between the parties, Wade predicted less stimulus and the re-ignition of the trade wars, factors which would limit growth.
“For now, no clear result is probably the worst possible outcome from an economic perspective as uncertainty increases and stimulus hopes fade,” Wade wrote.