US mid-term elec­tions: Is grid­lock good?

The Star Malaysia - StarBiz - - BizWealth -

THE US mid-terms have, as ex­pected, seen the Democrats take the House with the Repub­li­cans hold­ing the Se­nate.

Schroder’s in­vest­ment ex­perts con­sider the im­pli­ca­tions for fis­cal pol­icy, trade, and the 2020 pres­i­den­tial elec­tion.

Fur­ther tax cuts un­likely but will Trump strike a deal on trade?

Schroders chief econ­o­mist Keith Wade says: “The mid-term elec­tions re­stored some faith in opin­ion polls with the Democrats tak­ing the House of Rep­re­sen­ta­tives and the Repub­li­cans hold­ing the Se­nate. Con­ven­tional wis­dom has it that a grid­locked Congress is good for mar­kets as it pre­vents politi­cians from in­ter­fer­ing in the econ­omy. How­ever, US mar­kets have re­ceived a con­sid­er­able boost from the pres­i­dent’s tax cuts and dereg­u­la­tion mea­sures.

“Go­ing for­ward, grid­lock means less fis­cal sup­port for the econ­omy as Democrats are un­likely to back fur­ther tax cuts. This could cre­ate a prob­lem for US growth in 2020 when the ex­ist­ing pack­age fades and is not re­placed by fur­ther mea­sures.

“It is pos­si­ble that the pres­i­dent and the Democrats could strike a deal on in­fra­struc­ture spend­ing, but they may hes­i­tate to take mea­sures that could help get Trump re-elected as pres­i­dent,”

Wade says that faced with a po­ten­tial block on fis­cal pol­icy, the pres­i­dent may turn to trade pol­icy and look to strike a deal with China and so prevent a fur­ther dam­ag­ing es­ca­la­tion in the trade war.

“From an eco­nomic per­spec­tive, that would be the log­i­cal step. How­ever, Trump will have to weigh up whether the eco­nomic costs out­weigh the po­lit­i­cal ben­e­fits of play­ing to his base sup­port – many of whom see tar­iffs as an es­sen­tial part of putting Amer­ica first,” Wade sums up.

Fu­ture pol­icy will re­quire bi­par­ti­san sup­port

Schroders Multi Re­gional Eq­uity, port­fo­lio, Frank Thor­mann says: “Two im­por­tant im­pli­ca­tions from this elec­tion will be stronger pres­i­den­tial over­sight and in­creased po­lit­i­cal grid­lock. Democrats now have a much larger abil­ity to put a check on the pres­i­dent’s power and have promised to in­ten­sify in­ves­ti­ga­tions into al­le­ga­tions such as the Rus­sian 2016 elec­tion in­ter­fer­ence,”

Thus, be­cause both houses are re­quired to pass leg­is­la­tion, fu­ture pol­icy will re­quire much greater bi­par­ti­san sup­port, which is a dra­matic change from the past two years and is likely to ma­te­ri­ally al­ter the re­main­der of the Trump pres­i­dency.

One im­me­di­ate im­pact of this is a lower like­li­hood of fur­ther fis­cal stim­u­lus.” says Thor­mann.

Larger Repub­li­can Se­nate ma­jor­ity is sig­nif­i­cant

Schroders US Small Cap Prod­uct Man­agers Head of Eq­ui­ties Man­age­ment Fred­er­ick Schae­fer says: “In a re­buke rather than a re­jec­tion of the pres­i­dent, US vot­ers have elected a di­vided Congress. The Democrats gained con­trol of the House of Rep­re­sen­ta­tives af­ter eight years as the mi­nor­ity party.

“In the House, a num­ber of Repub­li­can mod­er­ates lost or chose not to stand for re-elec­tion. This means the Repub­li­can House cau­cus will be­come more con­ser­va­tive and more Trump-like. The new House Demo­cratic ma­jor­ity will be more chal­leng­ing to the pres­i­dent on a num­ber of is­sues. Con­sider the pos­si­bil­ity of a House com­mit­tee is­su­ing a sub­poena for him to re­lease his tax re­turns,” says Schae­fer.

He says that on the Repub­li­can side, the larger Se­nate ma­jor­ity is a sig­nif­i­cant ac­com­plish­ment. Ad­di­tion­ally, Repub­li­can gu­ber­na­to­rial can­di­dates fared well, win­ning races in key states such as Ohio and Florida.

As the US ap­proaches the 2020 elec­tions, these two states are sig­nif­i­cant prizes in pres­i­den­tial elec­tions.

“In an in­ter­view on the eve of the elec­tion, Mr Trump con­ceded that maybe he should have toned down his rhetoric dur­ing his first two years. Per­haps this may presage a less bel­li­cose pres­i­dent and less con­tentious Wash­ing­ton. But don’t count on it.” says Schae­fer.

Grid­lock means less fis­cal sup­port for the econ­omy as Democrats are un­likely to back fur­ther tax cuts. This could cre­ate a prob­lem for US growth in 2020 when the ex­ist­ing pack­age fades and is not re­placed by fur­ther mea­sures. Keith Wade

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