Gonzalo de Cadenas-Santiago
Director of Economic and Financial Research at MAPFRE Economics
Next week will see another turn of the screw for US domestic politics, which will have an inevitable impact on international politics. The most likely outcome is that Biden will emerge as victor, but politics is a capricious game and his opponent may well secure a second term. Trump has followed the tradition of former Republican presidents by lowering taxes and driving deregulation. However, he has taken trade and foreign policy in a new direction, with mixed results.
The battle to get behind that famous desk in the White House comes at a time of greater economic optimism (MAPFRE Economics expects GDP to fall by 4 percent in 2020 compared to the 8 percent drop predicted 3 months ago, and next year we expect activity to recover by 3.3 percent). This is thanks to the effects of stimulus packages, a relative easing of pandemic restrictions and improved confidence. But this strategy has also led to a sharp widening of the deficit, with direct transfers, subsidies, and exemptions having increased public spending by 2.1 percent. It has also increased national debt, now at 131 percent of GDP, and impacted the Federal Reserve’s balance sheet which, at 34 percent of GDP, has almost reached the point of resorting to direct asset purchases. It is also worth noting that both candidates will be acutely aware of the fact that the fiscal effort made to date currently accounts for approximately 15 percent of GDP.
The uncertainty caused by the COVID-19 pandemic will continue to weigh on the confidence of consumers and businesses. The extension of this prolonged uncertainty will test the solvency of many businesses and the strength of the labor market. Due to this, households and businesses may see a surge in defaults. If this lasts much longer, it could cause structural damage to the very fabric of the business world, with a particular impact on the accommodation, transport, hospitality and leisure sectors. As a result, many countries are under financial stress. Falling tax revenue and increased spending associated with the crisis may also cause difficulties in the areas of public spending and employment.
In this scenario, the consensus is that Trump’s re-election would be tortuous at best. It would most likely lead to legislative stalemate, an influx of lawsuits and deep partisan divisions. He would continue with a very similar agenda to the one he followed during his first term, including deregulation, attempts to renegotiate trade agreements for the benefit of the US and the fight against illegal immigration.
His second term would be similar to his first, bearing particular likeness to the early period from 2017 to 2018, which focused on deregulation, tax cuts and a transactional approach to foreign policy. And since the House and the Senate are likely to hold more democratic representation this time, which would delay—or even block—any action by Trump’s administration, every decision would be accompanied by the President’s unmistakable trademark of signed executive orders.
Conversely, a victory for Biden would lead to competing priorities, almost all of which would be anathema to Trump: measures to tackle climate change, raise corporate tax rates and improve the Affordable Care Act (Obamacare). Therefore, obtaining budgetary approvals is likely to be difficult for both parties, and measures like those employed recently to keep the federal government funded (such as raising the debt ceiling) will probably be necessary. Congress has approved the CARES Act, mobilizing an additional 2 trillion dollars of fiscal stimulus (15 percent of GDP) to reduce the financial strain on households and businesses. Negotiations are now underway regarding a 1.2-trillion-dollar extension, but its approval (which may include certain conditions) has been postponed until after the election.
Finally, the third possible scenario, and the most feared of all, would be an inconclusive outcome. This would lead to months of political uncertainty, paralysis and both sides becoming entrenched in their positions. This would severely limit the scope for negotiation and compromise, and make it difficult for the parties to agree on a comprehensive package of measures to get the economy back on its feet. That would be the case even in areas where the two parties are in agreement, such as on whether there should be more fiscal stimulus and COVID-19 support, and the infrastructure development plans that the country so desperately needs.
So, regardless of which candidate finally emerges victorious, the US economy faces large clouds of uncertainty over the coming months, which are unlikely to clear even after the first Tuesday of November.