Mid-term US elections may spell trouble for President Trump, says Robeco Chief Economist Léon Cornelissen.
Americans go to the polls on 6 November to elect the entire 435-seat House of Representatives and one-third of the 100-seat Senate, along with 36 state governors. These ‘mid-term’ elections coming in the middle of Trump’s first term are usually seen as a referendum on the sitting president.
Trump’s Republican party currently controls both chambers of Congress, though polling suggests that the rival Democrats will take control of the House, with a smaller chance of controlling the Senate. The president and his party are currently under investigation by a special counsel led by former FBI director Robert Mueller over alleged collusion with Russia in the 2016 presidential election.
“A Democratic majority in the House will probably lead to the start of an impeachment procedure, and there would also be intense scrutiny of the president’s present and past financial situation, including his tax returns,” says Cornelissen. “But the two-thirds majority in the Senate that is needed to remove him looks far off, unless the Mueller investigation presents especially damning material.”
“The dollar could be vulnerable amid rising political tensions if impeachment proceedings are started: the perceived risk of a major constitutional crisis in the US could unsettle investors. But the flipside is that if Vice-President Mike Pence takes over, in terms of economic policy, this would probably soften the current extreme procyclical budget policy of the US administration.”
“It would reduce the risk of the US economy overheating due to additional tax cuts, this time aimed at the middle class, while a push to improve infrastructure would be much smaller. Tensions with China on trade, however, would not ease very much.”
The Democrats have been more vocal than the Republicans or neutrals in trying to impeach Trump. However, no US president has ever been successfully impeached: Andrew Johnson (1868) and Bill Clinton (1998) were acquitted by the Senate, while Richard Nixon (1974) resigned before the process could be completed.
Polling suggests that the Democrats will do well in a protest vote against Trump, seen as a ‘blue wave’ after the party’s colors (the Republicans use red). A poll of polls by Real Clear Politics put the Democrats on 48.7% and the Republicans on 41.0%, which would translate into the Democrats retaking both the House of Representatives and Senate. However, with Senate seats tending to be less volatile, other polls predict the Democrats will only retake the House.
“Our baseline scenario is a divided Congress,” Cornelissen says. “That is likely to thwart some of Trump’s hobby horses, like building the wall on the Mexican border, as there is no way that the Democrats would approve the legislation. It would at least slow him down on the more extreme plans.”
“But it will be easy for him to find common ground with the Democrats in generating additional fiscal stimulus, increasing inflationary risks and putting upward pressure on long bond yields. The Fed risks getting behind the curve, inviting yield curve steepening.”
Meanwhile, Trump is likely to try to appeal to both sides as he seeks a second term. “Trump will probably continue to fight a low-intensity trade war with China, as both Republicans and Democrats support this, and start to focus on the battle for re-election in 2020,” Cornelissen says. “Additional fiscal stimulus is likely, which means the US could easily become a high-pressure economy, with increasing risks of overheating.”
“The Fed will counter by raising interest rates, but will be careful not to seem too aggressive; its last rate hike has already angered Trump. Of course, to pass the budget, Trump will need a majority in the House, but it probably won’t be that difficult to find common ground with the Democrats on tax policy and infrastructure.”
Previous mid-term elections have proved worrying for the sitting president: the Democrats won the 2006 elections in the middle of Republican President George Bush’s second term. This was seen as a response to his handling of Hurricane Katrina and the invasion of Iraq and left him facing opposition in both houses of Congress for the remaining two years of his presidency.
This was reversed in 2010, when the Democrats suffered huge losses in Barack Obama’s first term and the Republicans recaptured the House, in the biggest political swing since the Great Depression. This was seen as a protest against the poorly performing economy, as US unemployment then stood at 9%.
In the 2014 mid-terms, during Obama’s second term, the Republicans recaptured the Senate as well, before achieving a clean sweep in 2016, retaking the White House in the presidential election.