Donald Trump’s loss of control of the House of Representatives and the Senate has put the world economy on notice for an unpredictable final two years of his presidential term. After Democrats swept aside his Republican party in the midterm elections, analysts said the prospect of a highly erratic lame-duck president would have significant implications for financial markets, growth, inflation, government borrowing costs and living standards. Here are the biggest expected consequences for the US economy and for other countries.
Markets initially dropped in early trading in Asia overnight but rallied as investors weighed up the midterm results. Investors typically dislike uncertainty and political chaos. The fact that the president conceded the result and acknowledged the impact of the Iran war has been taken as a positive in markets.
However, his warning that he will become “Mr Veto” raises the prospect of a turbulent finale to his time in the White House. Holger Schmieding, the chief economist at Berenberg, said the result showed that US voters had “rejected Trump and his somewhat authoritarian penchant for crony capitalism. [That] shows that US institutions and its checks and balances work. That is a positive, in my view.” Much of the outlook for stock markets, inflation and growth is contingent on the war in the Middle East and the pace of the advance of artificial intelligence.
Traders expect the Democrats to take a tougher line on AI regulation and the datacentre rollout, raising questions over a driver of stock market growth. There are also concerns that Trump, with the midterms out of the way and his control over domestic policy weakened, could take a more aggressive approach to foreign policy, with the potential to intensify the war in Iran. The cost to US households from surging inflation triggered by a deeply unpopular war, alongside a chaotic tariff policy that has devastated small businesses, was key to the midterm result.
US diesel prices surged to a record high in August, while the headline inflation rate has risen to 3.7%. The US-Israeli invasion of Iran, leading to the closure of the critical strait of Hormuz, reignited global inflationary pressures amid the biggest energy price shock of the modern age. The oil price fell back on Wednesday, dropping by as much as 9% to trade below $100 a barrel for the first time in a month, as investors digested the midterm results amid hopes of a diplomatic breakthrough on Iran.
Trading at about $94, Brent crude, the international benchmark, remains significantly higher than its prewar level of about $70. As a consequence, the International Monetary Fund (IMF) expects global headline inflation to rise to 4.7% this year, with energy-importing countries hardest hit. The possibility of Trump ramping up hostilities against Iran would add to the inflationary shock, but it would also further add to his unpopularity.
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