Harris vs Trump. 4 scenarios of how the US election result will impact the economy

ECONOMYHarris vs Trump. 4 scenarios of how the US election result will impact the economy

With the upcoming US presidential election, investors are preparing for market volatility and potential political changes. The key question is to what extent victory for one of the candidates – Trump or Harris – and the balance of power in Congress will affect economic growth, inflation and monetary policy. I point to four scenarios in which each outcome could bring different challenges and opportunities for the economy.

The date of the US presidential election (November 5th) is fast approaching. According to the latest pre-election polls, Kamala Harris remains a slight favourite and support for Donald Trump decreased in October. Hence, the chances of both candidates are balanced. At the same time, there have been significant changes in financial markets. The US dollar (USD) has clearly strengthened, gaining over 3% against the Euro since the end of September and currently fluctuates around 1.08 USD/EUR. At the same time, market yields in the US have surged. While the yield on 10-year US Treasury bonds was just over 3.7% at the beginning of October, this represents a significant increase.

Rapidly rising interest rates in the US are undoubtedly supported by solid economic data, especially from the labor market. At the same time, the market is increasingly skeptical that the US Federal Reserve (Fed) will decide on rate cuts anytime soon. However, the increase in rates may also reflect financial market concerns about election uncertainty. It seems almost certain that regardless of which candidate wins, American fiscal policy, characterized by large budget deficits and rising debt, will remain largely unchanged.

Assuming that the election result will not influence a change in fiscal policy, further growth in indebtedness, increased consumer inflation breaching the Fed’s target (2%) and higher interest rates in the US by 2025 are predicted. However, the election result could also impact other areas of the economy. There are four possible scenarios:

SCENARIO 1: Trump wins, Republicans control Congress

In this scenario, if Republicans gain full control, expansive fiscal policy can be expected by 2025 – tax cuts and deregulation should stimulate GDP. At the same time, broad tariffs could be introduced – 10% on all US imports and up to 60% on goods from China, along with stricter immigration policy. The net effect of this approach on the US economy would be neutral – benefits from tax cuts would offset the negative impact of tariffs and immigration limits. As a result, US economic growth will remain unchanged – gains from tax cuts will be offset by the negative effects of tariffs and immigration restrictions. Consequently, inflation will rise, prompting the Fed to raise interest rates. In my view, rate increases, inflation, and deficits will have a neutral impact on the dollar exchange rate.

SCENARIO 2: Trump wins, but Congress is divided

In this scenario, an expansive fiscal policy will be implemented (tax cuts and deregulation), positively affecting GDP growth. Protective measures will not be applied or will be limited by selective imports from China, allowing for greater economic growth than in the case of full tariffs from scenario 1 (the negative impact of tariffs would be absent). I would also expect that expansive fiscal policy, coupled with low unemployment, will contribute to inflation growth (though to a lesser extent than in scenario 1), forcing the Fed to maintain higher interest rates for longer. As a result, higher rates and moderate inflation may bolster the dollar.

SCENARIO 3: Harris wins the election, Congress is Democratic

In this scenario, a full Democratic control could result in tax increases and government spending, potentially weakening US economic growth slightly and increasing unemployment by 2025. I assume that consumer inflation will continue to fall to 2%, allowing the Fed to lower interest rates more quickly, thus weakening the dollar.

SCENARIO 4: Harris wins the election, but Congress is divided

In this scenario, the Tax Cuts and Jobs Act (TCJA) is extended, positively affecting economic growth in 2025. Changes in taxes and spending will be limited, and their impact on the economy moderate. The impact on inflation will be neutral or slightly positive, and the Fed will be able to lower rates, albeit more slowly than in the fully Democratic scenario (3). The dollar will remain stable.

Assuming that it is more likely that the Senate will be Republican, scenarios 1 and 4 seem a bit more realistic than 2 and 3 in my opinion. The most significant expected effects for GDP, inflation, interest rates, and USD exchange rate are presented in the following table.

Author: Miroslav Novák, analyst at Akcenta

Source: https://managerplus.pl/harris-kontra-trump-4-scenariusze-jak-wynik-wyborow-w-usa-wplynie-na-gospodarke-71973

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