Paul Diggle
Hello and welcome to Macro Bytes, the economics and politics podcast from abrdn. My name is Paul Diggle.

Luke Bartholomew
And I'm Luke Bartholomew.

Paul Diggle
And we are speaking on Wednesday, the 6th of November, in the early afternoon in the UK, on the day of the US presidential result. So, we're going to dissect the results and importantly, how markets are thinking about the implications of a Trump presidency and how we're thinking about the economic implications.
I'm joined in this conversation by Lizzie Galbraith and James McCann. Welcome, Lizzie. Welcome, James.

Lizzie Galbraith
Hello.

James McCann
Thank you for having us.

Paul Diggle
So, Lizzie, why don't we get straight into the results? A pretty convincing victory for Trump in the electoral college; victory in the Senate. And at this point, we don't know the House outcome, although that is tending towards Republicans at this point in time.
What particularly stands out for you in the results?

Lizzie Galbraith
Yeah. So, what we've seen is Trump has made fairly broad-based gains across the US electorate. So we've seen all states that have been called so far trending towards the Republican Party, regardless of the topline outcome there. So it seems like it's been a very good night. And we're actually seeing the very likely probability that Trump will win the popular vote, which has been something of a rarity for Republican presidential candidates in recent US electoral history. So, I think that goes some way to demonstrating the broad nature of the gains that Trump has made. It's not among one group. It seems to be pretty well spread out across the US population. And that's how we've seen all of the swing states probably – we’re still waiting for some to finish counting at the time of this recording – trend towards Trump.

Paul Diggle
And Republican voters, particularly motivated by the economy and immigration. Obviously, polling was somewhat tighter in the final result. Is this a case, Lizzie, of yet another polling error, or are we really talking about margin of error stuff here that shouldn't surprise us too much?

Lizzie Galbraith
I think this is actually more margin of error than it is the sort of historic polling error that we saw in 2016 and 2020, where there were genuine significant polling misses in the swing states. Now, some of the polling misses in this election are fairly large, if you look outside the swing states where we don't tend to have as much polling. But in the swing states themselves, which are obviously the most heavily scrutinised states in the US electoral landscape, we have actually seen the results so far fall within a sort of standard margin of error, which we see as being roughly three points or so. So I think it is more that we're seeing these results within the margin of error, but they are tending to be on the higher end of that margin. And all have favoured Trump. So we're continuing that trend that we've seen in 2016 and 2020, but nowhere near to the same extent. So I wouldn't really call it a polling myth this time around, given that it falls within that expected margin of error that we've had for this entire race. But nonetheless, Trump has been slightly underestimated by pollsters in the final weeks of this race.

Luke Bartholomew
And as Paul said at the start, I mean, at the time of recording, we don't yet formally know the results of the House election. And much turns on this because many of the aspects of the Trump policy agenda that matter the most to markets in the economy – tax, regulation – would depend on the Republicans having unified control of Congress. So, Lizzie, how are things shaping up on that front at the moment? And do we have a sense of when we will know more definitely how the result will stand?

Lizzie Galbraith
So right now we know that the Republicans are definitely going to take the Senate. It was always looking like an incredibly likely possibility because the Senate map is very favourable to Republicans in this cycle. And they've already done that with quite a few Senate races left to count. So, there is margin there for the Senate majority to increase by the time we finish counting. But we know that Trump will benefit from control of the Senate, which gives him greater latitude to see his appointees pass through Congress, for example. So it's an important strategic victory there. The uncertainty is around the outcome in the House, where we do think that eventually it is going to result in a narrow majority for the Republicans, giving Trump unified control of Congress. But there are some very tight races there that are taking quite a long time to count. So we may not know what's going on there until maybe four or five days' time if the count is particularly slow. But we are expecting that, although there is still an avenue there for the Democrats to retain control, we're not expecting that to happen, given all of the tailwinds we're seeing for the Republican Party across the rest of the races. So a narrow Republican majority in the House and also a certain majority in the Senate.

Luke Bartholomew
And James, as I said, part of the reason the House race is so crucial is what it means for fiscal policy, tax policy. So let's assume the Republicans do win the House, as does look likely at the moment. How should we think about the scope for tax cuts? What are the likely measures to be passed, and how might that affect the economy?

James McCann
Yeah, a unified Congress certainly opens the door to setting fiscal policy in a more deliberate direction. And I think tax cuts will be pretty high on Donald Trump and congressional Republicans' agenda when they come in next year. Obviously, part of that agenda will be extending those aspects of the 2017 Trump Tax Cuts and Jobs Act, which have already expired and which are set to expire at the end of next year. And that, in itself, represents quite a significant fiscal loosening based on current policy, or at least based on current law. But then Donald Trump has gone ahead and promised a whole slew of different tax measures on the campaign trail. Now, these range from further corporate tax rate cuts, including much larger cuts for those producers that manufacture here in the United States. He's promised cuts on taxes on tips, on social security benefits, on overtime. He's promised a very wide range of tax cuts on small businesses as well. So when we try and add all these up, it amounts to around a $10 trillion increase in the deficit over the next 10 years. And we know the US public finances are already stretched. And so that looks a very implausible tax programme to implement based even on a unified Republican Congress. So I think it'll be a case of picking and choosing aspects of that agenda and leading to a tax cut plan which is much smaller, but the exact scope and scale is still pretty uncertain and might depend in part on the working majorities – if Trump is able to unify Congress, the working majorities that they have in the House and the Senate in terms of what they can get through. But all in all, a loosening in fiscal policy, albeit with uncertainty over the scale and probably some increase in deficit, certainly based, certainly compared to, at least, current law.

Paul Diggle
And James, trade and tariff policy has obviously been a long-running, consistent part of Trump's policy agenda. He's talked about potential 60% tariffs on all Chinese trade with the US, 10% to 20% global baseline tariff. How much of that is possible in practice? How are we thinking about the course of tariffs under a Trump presidency?

James McCann
Well, Trump has significant leeway to implement tariffs independent of Congress. He can do a lot via executive order and other investigations through USTR. So he's less reliant there on Republicans taking the House and can act more independently. So that's something that regardless really of the congressional outcome is certainly possible. There are procedural dynamics. It would be quickest and easiest to implement further tariffs on China, given the infrastructure and framework around those tariffs and the investigations required to implement them, has already been done as part of Trump's first term, so he could implement those tariffs relatively quickly on China, almost from day one. It's possible that he broadens the scope of those, but that would require that infrastructure work to be done across other product lines for other economies, too. So there would be some delay and obviously we'd get some signposts of what was coming. As those investigations kicked off with clear, I suppose, stated aims around what they were trying to achieve, which would be some form of trade policy restrictions against those countries. So I think procedurally, it's certainly possible that we see something on China relatively quickly. It's possible we see something on a broader range of countries in the not-too-distant future. I think the key judgement is how much will Trump follow through on those campaign promises we saw during his first term. He did follow through on measures against China quite significantly. And that reflects a, I think, a bipartisan, quite hawkish view across the aisle on how to deal with Chinese trade practices, on Chinese trade imbalances, on Chinese geopolitical threats as well. So, you know, certainly he followed through on that aspect. With regards to some of the broader threats on trade, let's say leaving NAFTA, let's say tariffs on European automakers, they were not followed through on, although there was a lot of noise on, there was a lot of noise around those types of issues. So it's not impossible we see the same dynamic this time with China coming under immediate focus. And then a more threat, rather than follow through, in terms of trade with other countries. But we'll have to see how those signposts lay out and particularly how the infrastructural roadmap towards those broader tariffs, is followed by Trump and his administration.

Paul Diggle
Yeah. Clearly possible that he is very serious on the China tariffs and looking for continued economic decoupling between the US and China. But, say on those European tariffs, there is scope for a deal to be done potentially on increased European defence spending, for example. But Lizzie, immigration is another really important aspect of Trump's agenda from the perspective of the economy. How much can he do on that front in terms of limiting inward migration into the US? And then even further than that, actually stepping up deportations in a big and significant way.

Lizzie Galbraith
So I think it's going to be easier for Trump to attempt to limit new arrivals into the US. We're likely to see, should Trump get unified control of Congress, a fairly significant border bill, passed through Congress, which will aim to limit the presence of unauthorised migrants in the US, as well as new arrivals at the southern border as well. So we think that's going to be based on a bill called H.R.2, which was passed by the Republican-controlled House in the previous Congress and failed to pass a Democratic-controlled Senate. Now, obviously, if we have unified Republican control, then the passage of a bill of the same flavour becomes a lot easier, given the political agreement that the party has. And a bill of that sort would likely include measures like requiring employers to make sure that their employees are authorised to work in the United States. It would probably also contain quite a significant curtailment of routes to asylum in the US, as well as probably some fairly substantial increases in funding for border security, as well as renewed construction of the border wall with Mexico. Now, there are also other avenues that Trump may want to explore. He has talked a lot, as you alluded to, about deportation on the campaign trail and stepping up deportation of unauthorised migrants. Now he's talking about deportation of, sort of, millions of undocumented migrants. It's not actually clear that there are that many to deport in the first place. But in practice, it's likely to be really difficult to enact a large-scale deportation programme like that, in any sort of realistic scenario. So I think we can probably say that in a scenario where Trump is very focused on immigration, we do see deportations rise, but it's unlikely to be of the scale that Trump is talking about. And it may have more of a deterrent effect than actually actively reducing the number of non-US citizens in the country overall. So deterrence, I think, is going to play a large part in this policy platform as much as the active removal of non-US citizens will.

Luke Bartholomew
And then, James, there’s a Fed policy decision announced tomorrow, I'm not sure there's a high degree of uncertainty around that. It looks very likely there'll be a 25 basis point cut then. But I think it's also fair to say that looking further to the future, there's perhaps now a bit more uncertainty around the path of policy, given this election result and potential changes to the policy mix. So I wonder, first, how do you think the Fed's thinking about this shifting economic policy and perhaps some of the trade-offs that are involved in thinking about the different shocks that are hitting the economy, adverse supply shock from tariffs and the like. And then second, how the Fed might think about the shift in financial conditions that occurred because there has been an extension of this so-called Trump trade following the result, with the dollar higher, yields up, US equity markets stronger, oil down, Bitcoin up for what that's worth. And it's worth saying that that need not be how the market eventually trades over the medium term. That will depend on the House results, we've talked about the policy mix as revealed in due course. But, you know, either way, the shift in financial conditions arguably would have some impact on the economy. So how will the Fed think about that as well?

James McCann
Yeah, so let's start with how the Fed thinks about policy, policy uncertainty. You know, certainly it creates some dilemmas for the Fed. First of all, in how it might factor in or anticipate future policy moves, the extent to which it should do so, whether amidst rising policy uncertainty, it should move in a more cautious manner. And that might mean cutting rates more slowly. It will want to be wary of factoring in too much before it happens. So factoring in tariff increases before they've been delivered, looser fiscal policy before it becomes law. So I think that's one thing the Fed will be cautious not to do. But it will need to take into account that some of these policy dynamics are discussions are going to be more live and how should it think? You know, alongside the competing questions that it already has on the economy, to what extent is policy tight or not? To what extent is inflation proving bumpy on the last mile? How robust is the economic cycle? This policy uncertainty dynamic that we've discussed through the course of this webinar is another factor it has to, it has to bring into its decision making and conversations and thought process. Now you could argue, and markets have factored in at least some expectation, that it means the Fed will be a little bit more cautious with regards to how it eases interest rates. And in some ways, I don't think that's a totally unreasonable initial expectation.
And then on the financial conditions dynamic, it's a complicated one for the Fed. Does it believe that that's a fair and representative repricing in where the risks are around the economic outlook? Or does it believe that it's something that's, you know, pushing policy in a direction that's inappropriate? You know, it is fair to highlight that the way that the financial conditions are changes is quite interesting. So obviously you've got that dynamic where domestic equities are relatively robust. Certainly, if we look at small cap equities, which we might think would be the best indicator of where US domestic corporate earnings are going and domestic growth is going, and that's up around 4.5% at sort of time of speaking over the course of today so far. And so that's indicating at least some expectations, to me at least, around the stronger nominal growth environment for the US companies. And then the interest rate structure has moved higher as well. And that's probably factoring in a couple of things. One is that expected, you know, growth and inflation dynamic being somewhat different. One might be as well, with the interest rate structure, some increase in term premium as borrowing expectations are increasing. Maybe the market is factoring in a risk at least of some more tampering or interference in the Fed or, you know, some more noise at least around the Fed. You know, I think, you know, certainly I don't think it's only the factors into the Fed's decision making. At least, I think, you'll feel that those moves are consistent enough to not warrant a pushback or a big direction, a directional change in where it’s signalling policy. So I think for the moment the Fed will do its cut tomorrow. I think it will signal that it's data dependent from here. Probably that the direction for rates is still lower. It won't row back in, you know, entirely on that, but be very unspecific around when the timing and extent of those cuts will come. And then I think it’ll just be watching like the rest of us, you know, which aspects of the agenda are followed through on? How does that translate into market pricing and, you know, most importantly, how is that showing up in current and anticipated future growth and inflation?

Paul Diggle
And of course, global central banks will be thinking about this in various different ways. For Europe, the European Central Bank, which may be looking at, potential increases in tariff levels, already looking at a slowdown in its own domestic economy, higher rates in the US and globally may be a sort of unwelcome exogenous tightening in financial conditions that that may mean a slightly more dovish path for ECB policy. On the other hand, many emerging market central banks could be looking at the rally in the dollar, the selloff in their own currency, as requiring a somewhat more hawkish stance. And of course, Chinese policymakers are also going to be thinking about this from the perspective of how much stimulus they may add to the economy. Lizzie, how will governments around the world be thinking about a Trump presidency, though, from a sort of geopolitical, a global conflict perspective? I mean, it has implications for Europe, via Russia-Ukraine, it may influence dynamics in the Middle East. How is that international dimension going to play out?

Lizzie Galbraith
So I think there is potential here for quite a significant shift in US foreign policy relative to where it has been under President Biden. We know that Trump doesn't share Biden's trust of multilateral institutions. For example, he has very different views about the role that the United States should be playing on the world stage. So I think it does have quite significant implications and what we've seen so far is most governments that may be exposed in some way have been attempting to very quickly contact Trump to congratulate him and attempt to open up dialogue. So I think there are some lessons learned from Trump's first term, where they understand the importance of establishing an early relationship with Trump, and attempting to establish positive relations early on, rather than expecting that Trump will come to them, as the newcomer on the world stage. So I think expectations are going to proceed relatively in line with what we saw in Trump's first term. I think there will be pressure to see some of the active conflicts we have around the world, particularly Ukraine and in the Middle East, resolved. And I think Trump is going to be maybe more keen to see those end quickly than maybe we've seen with the Biden administration. And it also has implications for conflict risk as well, particularly with regards to Taiwan, for example, where we may see shifts in US policy, or at least rhetorical shifts in US policy, given that we know that Trump has historically had a tendency to move ahead of where the State Department may be on certain issues. So more volatility, I think, potentially more uncertainty. But governments, I think, are more understanding of the kind of foreign policy views Trump has in his second term relative to his first.

Luke Bartholomew
So I suspect we will be coming back to all of these topics in coming weeks, and indeed years, as the policy agenda and its implications unfolds. But that is all that we have time for this week. So as ever, let me ask you to like and subscribe wherever it is that you listen to your podcasts. And then all that remains is for me to thank Lizzie and James for joining us today, and to thank you for listening. So thanks very much and speak again soon.

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment, recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication, and do not necessarily reflect those of abrdn. The value of investments and the income from them can go down as well as up, and investors get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.

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บทความที่เกี่ยวข้อง

US Election: It’s Trump. What's next?

A budget for growth, or for higher gilt yields?

Emerging markets outlook: Easing cycle broadens

Are the EU fiscal rules made to be broken, or just broken?

Is the UK now an island of political stability?