The US is just three weeks away from a presidential election with potentially major repercussions for economic policy in the US and further afield. Daniel Morris, chief market strategist, and Mark Allan, US economist, review the key points.
The 2020 US elections take place on Tuesday, 3 November 2020. Let’s first remind ourselves of the US political structure.
US government 101: Congress
The United States Congress, the legislative arm of the US government, consists of two bodies: the Senate (upper house) and the House of Representatives (lower house). Passing legislation requires the agreement of both the House and Senate.
Today, Congress consists of 100 senators (two from each state) and 435 voting members of the House of Representatives. The number of representatives a state has is determined by its population.
On 3 November, all 435 seats in the House of Representatives, 35 of the 100 seats in the Senate as well as the office of President of the United States will be contested. In addition, elections will be held for 13 state and territorial governorships, as well as a number of numerous other state and local bodies.
The current situation
Democrats have held a majority in the House since the 2018 elections, while Republicans have controlled the Senate since the 2014 elections.
The Democrats enter the 2020 election with 232 of the 435 seats in the House to the Republicans’ 196, giving them a sizeable 37-seat advantage. The Republicans hold a 53-47 advantage in the Senate.
Control of both the House and the Senate: A Democrat clean sweep?
To enact sweeping change, the next administration would need to have a working majority in both the House and the Senate. This is particularly true given the very partisan climate that has reigned in US politics in recent years.
Currently, Democratic candidate Joe Biden leads President Trump by around 10% in opinion polls. In addition, the Democrats are clear favourites to retain their majority in the House. It would be a huge surprise if they do not do so. It is therefore control of the US Senate that is likely to be crucial in this election.
The 2020 contest for the Senate: down to a few states
This year, the Republicans have to defend 23 of the seats up for election, compared to 12 for the Democrats. Theoretically, to gain control of the Senate, the Democrats need to win a net three seats if Joe Biden wins (or four if he loses, because under the US constitution “the Vice President of the United States shall be President of the Senate, but shall have no Vote, unless they be equally divided”).
In our view, it is likely that the race for control of the Senate will come down to five key states: Maine, North Carolina, Iowa, Georgia and Montana.
We agree with the consensus view that the Alabama Senate contest is the only likely opportunity for Republicans to reclaim a Senate seat from a Democrat. We (and the consensus) anticipate that the Republicans will win Alabama (in a special election contest in 2017, the Democrats won Alabama for the first time since 1992, defeating a scandal-ridden Republican candidate). Under this scenario, the Democrats will actually have to win a net four states to hold control of the Senate.
Economic policy
With three weeks to go before the election and a week often being a very long time in American politics, there is still time for the race to change dramatically. Nonetheless, a clean sweep for the Democrats with Joe Biden in the White House and Democrats controlling both the House and Senate would potentially open the way for unprecedented fiscal stimulus.
In our view, it is quite plausible that a Democratic clean sweep could lead to fiscal stimulus of around USD 2.5 trillion in the next 12-18 months – that equates to around 10% of US GDP. By way of comparison, the tax cuts President Trump enacted in 2018 represented around USD 1 trillion over five years.
Exhibit 1 below summarises what we see as the probable implications of Republican or Democrat control of the White House and Senate for US fiscal policy and the outlook for monetary policy after the elections.
In a nutshell, the sort of very significant fiscal stimulus that a Democratic clean sweep could bring would potentially raise the level of inflation in the US. We will explore the potential consequences for financial markets of such a scenario in more detail later this week.
