What to expect from the US midterms

Election has limited implications for the growth outlook

At present, Democrats control all branches of government. Following the election, that is no longer likely to be the case; as is traditionally the case for incumbent governments mid-way through a term, the Democrats are expected to lose congressional seats and overall control of Congress. Opinion polls suggest Republicans are likely to gain control of the House, while the race for the Senate looks too close to call. For instance, The Economist’s election simulation (which is based on various opinion polls) suggests a Republican majority of around 15 seats for the House, but only a 2 seat majority for the Senate – the latter result being well within the polling margin of error. In any case, the US looks headed for a divided government once again, removing the ability of Democrats to pass legislation without Republican backing. Even if Republicans were to win both House and Senate, however, Republicans also won’t be able to enact legislation without President Biden’s sign-off. The election therefore has limited implications for the macro outlook, as Democrat spending plans have either been enacted (such as the $1.5tn Inflation Reduction Act) or shelved (much of the original $3.5tn Build Back Better plan), and Republicans cannot do much by themselves with congressional majorities.

What would Republicans do with majorities in Congress?

Probably very little of significance. There are various proposals to impeach President Biden (for instance over claims of corruption against his son Hunter Biden), but as we know from the experience with President Trump, impeachment by the House is all-but impossible to lead to conviction by the Senate, which would require a 2/3 majority. Where Republican majorities could have bigger macro implications, is over the raising of the debt limit, which is currently likely to be reached around Q3 2023. In the past, debt limit stand-offs have led to significant financial market volatility and risks to the growth outlook. Democrats could, theoretically, remove any threat of a debt limit stand-off next year by utilising the budget reconciliation process during the ‘lame duck’ session of Congress, between the election and January. Discussion around this is likely to gain traction once the results of the midterms are clear over the coming week. One final area to watch is Ukraine. Support for Ukraine has bipartisan support, but Republicans have expressed increasing opposition to the sums of money being sent to Ukraine. However, this concerns more the US’s financial backing of Ukraine rather than its political backing, which appears secure.

Will Trump make a comeback after the election?

Former President Trump has repeatedly hinted that he may run for the 2024 Presidential election Republican nomination, and that an announcement on this may come in the weeks after the midterm elections. However, his nomination is far from certain, and some big Republican party donors have suggested the party should move on from Trump. Much will likely depend on the relative success of Trump-affiliated candidates in the coming election, as compared to more mainstream Republican candidates.