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Edward Bell - Senior Director, Market Economics
Published Date: 08 November 2020
Joe Biden, the Democratic former vice president and senator, has won the US presidential election after securing more than enough votes in the electoral college. The President-elect has given a victory speech following the outcome on Saturday although President Donald Trump has yet to accept defeat and will likely mobilize his team and supporters for legal challenges and recounts, which have so far not been successful in finding voting irregularities or changing state results.
The Democratic Party has also managed to retain control of the House of Representatives with victories or leads in 223 seats compared with 212 among Republicans. However, the Blue Wave, in which the Democratic Party sweeps control of all chambers of the US government has yet to emerge and will be down to run-off votes for Senate seats in the state of Georgia. The results from the Senate vote have so far split 48-48 with North Carolina and Alaska both appearing to be retained by Republican incumbents, taking their provisional total to 50. Victories for the Democrats in Georgia would mean a 50-50 split where Vice President-elect Kamala Harris would have a tie-breaking vote.
President-elect Joe Biden’s priorities upon taking office are evident: ensuring the US gets control of the Covid-19 pandemic from a public health perspective and to repair the economic damage the virus has inflicted upon the country.
An additional round of fiscal support spending is what markets are looking out for to ensure that the US economy does not bear enduring scars from the Covid-19 pandemic but expectations for the scale of spending will likely need to be tempered. Proposals from the current Democratic-controlled House of Representatives have been for spending north of USD 2trn (around 9% of GDP), a level that wouldn’t pass filibuster in a new Senate even if Democrats did manage to win the 50+1 votes (with the vice president’s support). Current senate majority leader, Republican Mitch McConnell, has pointed to the improving labour market in the US as a sign that such large levels of spending aren’t required as the economy is improving and has proposed spending closer to USD 500bn (roughly 2% of GDP).
The nature of the stimulus is also significant for longer-run economic, and market, impacts. A boost to unemployment benefits, (such as returning to the USD 600/week of additional unemployment funds), cash handouts or assistance to state and municipal governments (so far a no-go for Republicans) would support the economy in 2021 and help households and firms offset the impact of Covid-19 on the economy. But longer-term ambitions of a Biden administration such as raising the federal minimum wage levels, expanding healthcare coverage or making substantial investments into green infrastructure would face resistance from the Senate. Getting spending beyond ‘rescuing’ the economy and into supporting long-run growth—upgrading skills, investing in infrastructure, easing healthcare concerns—would be more likely to help improve the domestic investment and inflation environment.
The Biden administration will also need to grapple with an enormous number of unemployed. US continuous unemployment claims are still at over 7mn, to be certain an improvement from a pandemic peak of nearly 25mn in May but still more than twice as high as their normal level in the past five years. Meanwhile the number of permanent job losses came in at 3.68mn in October. If the economy does find its footing under socially-distanced operating conditions and firms find ways to operate with fewer staff, the level of permanent job losses could prove sticky. Such a large number of out-of-work Americans will weigh on wage growth over the long run.
With an economy still healing and potentially intransigent institutions in control of fiscal policy, we expect monetary policy in the US will remain the main economic tool, albeit with diminishing returns given how far policy rates have come down and how extensive Federal Reserve asset purchases have already been. The Fed did hold its November FOMC last week amid a still uncertain outcome in the election and kept policy unchanged. We maintain our view that there will be no change in Fed rates policy in 2021 but that they still have the capacity to expand QE further, harden their forward guidance or tinker with existing programmes (such as reducing the minimum size of their Main Street Lending Program facilities like they did at the end of October when they lowered the minimum level to USD 100k from USD 250k).
The outcome of the election has not changed our view that US monetary policy will remain extraordinarily accommodative which will weigh on the outlook for UST yields and the dollar. We expect the recent run-up in UST yields to reverse as markets calibrate their expectations for fiscal spending at a lower level.
Second order priorities for a Biden administration will be on trade and foreign policy. We would expect a less impulsive approach to trade policy but not necessarily a complete unwinding of some of the tariffs that the Trump administration has put in place. A Biden presidency will likely maintain a firm line on its China policy but likely seek to back it up with support from other trading partners, such as the EU, Japan or Canada. That would mean that threats of tariffs on European or Canadian goods, for example, should dissipate in favour of coordinated action meant to improve trading conditions with China.
For the Middle East and North Africa region, a Biden administration may take several actions that reverse course from Trump’s foreign policy aims.
Among the more concrete policies we expect are the US rejoining the Cop 21 Paris Agreement on climate change which Joe Biden has said he will join on day one of his presidency. It should be of no surprise to the region that the Biden administration would be the greener of the two campaigns and we expect the impact of rejoining the Paris agreement will be limited in the near term. Additionally we would expect to see further pressure from the Biden foreign policy team for more normalization of relations between Arab states and Israel, a carryover from the Trump policy. That is likely to be accompanied by pressure on Israel to restrain settlements in Palestinian territories, helping to make normalization easier among Arab populations.
An uncertain but potentially significant change for the region would be whether the US re-enters the JCPOA, the Iran nuclear deal, under a Biden administration. Biden has said he would rejoin the agreement provided Iran lives up to its obligations—which it is currently not doing. Iran will hold its own presidential elections in 2021 where a hardline candidate could push the country further away from the deal. However, in a case where both sides re-engage in good faith and Iran is free to increase its oil production and exports, a significant boost in output could come at an unwelcome time for oil markets as OPEC+ countries are debating whether or not they themselves can increase output in 2021.
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