Home Finance Economic Implications for the US of the Recent Midterm Results

Economic Implications for the US of the Recent Midterm Results

by internationalbanker

By Raymond Michaels – raymond.michaels@internationalbanker.com

The Republican win in the US 2014 midterm elections held on November 4, has the potential to result in significant impacts on US economic growth and policy as well as the domestic currency, the US dollar. The dollar has been reacting positively since the vote, and this outcome has been in line with historical precedent. The dollar has gained on average six percent annually in the second half of a Democratic term over the past five decades and strengthens when a Democratic president is faced with a Republican Senate and House combination rather than a split Congress. The strength of the American currency has been supported by investors worldwide, who have taken the election outcome as a signal of less uncertainty for the US political and economic climates. Their assumption is that policy will be passed through more easily with a Republican House and Senate, rather than leaving the US economy in a political gridlock over policy matters—which has been the case with many key issues over the past four years since Republicans were elected as the House majority while Democrats held the Senate. Republican policy on immigration and trade will have far-reaching impacts on the US and subsequently the global economy over upcoming years. 

US growth has shown some steady and consistent development over the past year as certain elements of budget-policy gridlocks have been worked through within the US political system.   Budgetary and fiscal measures will be the key points of discussion over coming months. During Obama’s presidency, the government nearly experienced a default and did experience a period of shutdown—and these issues have created instability and uncertainty for the US economy on a domestic and an international scale. However, the US economy may be facing these kinds of uncertain circumstances again. The US government is currently operating under a somewhat temporary basis, and on December 11 the US Congress will again vote on how to proceed under budgetary constraints. This means that the government faces the potential of another shutdown, and this may undermine economic developments and gains made over the past year. Given the negative public perception of the outcome last time, it is more likely that a deal will be made this year—rather than gridlock and shutdown. The Democrats officially control the Senate until the end of the year; however Republicans are likely to vote for an extension until April 2015, at which time a budget resolution may be passed. 

If President Obama and the Republicans can agree on the major issues facing the US government and economy then the US economy is likely to move from strength to strength. Particular areas of concern on the agenda over the coming months will be foreign-trade deals, highway and infrastructure construction, disability benefits, corporate-tax reform and crackdowns on tax loopholes. Wider tax reform and free-trade measures are also expected to be key topics under discussion for policy change. The key to cooperation and progress between the Democrats and Republicans will now be trust—both parties hold a great deal of power and must work together for the sake of the US economy’s progress and development. Additionally, in-party trust and cohesion will be central to progress—certain members of the Republican Party remain vocally adversarial to the Senate leader, Mitch McConnell. These parties may influence certain key elements of policy through their votes—such as insisting that budget measures must act to end Obamacare, demanding cuts to federal spending or even allowing a default on national debt. It is vital that both parties work together to avoid the US economy and political system being exposed to any major unnecessarily damaging shocks  that would risk the stable and consistent development that has been occurring through the past year. 

In the past, prolonged skirmishes and gridlocks in political discussions have led to lowered consumer confidence, worsened employment levels and damaged stock-market performance. Further battles and clashes are likely to set the US economy back, given that the economy still faces too much uncertainty and is in only the early stages of strengthening. This would risk hampering growth for businesses and individuals across the country. 

As yet it remains somewhat unclear how the Republicans will steer the Senate. Only a handful of campaigns have indicated clear policies. By striking productive deals with President Barack Obama, the Republican Party is likely to fair better in the 2016 elections, so it is more likely they will work collaboratively. It will also be better for the US economy overall if the two parties can work together to make progress and policy developments come to fruition. 


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