A GDP growing by almost 2.5% in 2024, an unemployment rate of only 4.1%, inflation falling below 3%, American markets which are setting records… at first glance, the economic balance sheet of he Biden administration pleaded in favor of the Democratic candidate in the American presidential election.
By Enguerrand Artaz, fund manager, and Olivier de Berranger, CEO & Co-CIO
However, it is the economy which seems to have been one of the main architects of the defeat of Kamala Harris. More precisely, inflation, or rather, the price level. Indeed, if inflation in the strict sense, that is to say the rate of increase in consumer prices, has clearly declined for several months, consumer prices have nevertheless increased more by 20% in 4 years. They exceed by almost 15% the level they would have reached if inflation had remained on its pre-Covid trend. This reality, regularly recalled during the campaign, notably by the Trump camp to criticize the Democrats’ record, undoubtedly weighs on household morale. In the latest University of Michigan Consumer Confidence Survey, 40% of respondents blame prices for their worsening financial situation, one of the highest percentages since the late 1970s.
Thus, while part of the Democratic general staff tried to summarize the election as a referendum on societal questions, it is indeed the slogan of James Carville, Bill Clinton’s economic advisor in 1992, which seems to be used. be applied again. The role of economics in politics should not stop there. After having partly decided the fate of the elections, the economy could weigh on the room for maneuver of the new tenant of the White House.
From a strictly political point of view, the 47e President of the United States will have great latitude. Having won the popular vote handily, retaken the Senate and being, at this time, on track to retain the majority in the House of Representatives, Donald Trump should achieve a grand slam leading to strong political legitimacy. Moreover, while the unexpected nature of his 2016 victory had allowed the leaders of the Republican party to seize many key positions and to somewhat channel his most exuberant desires, Trump is now surrounded by an aeropage acquired by his ideas. Political safeguards therefore appear much less important for this second term.
It is the economy and, by extension, the financial markets which could take on the role of watchdog. In terms of growth, while the new announced reduction in corporate taxes will have a positive impact, increases in customs duties and, more marginally, massive expulsions of illegal immigrant workers risk being accompanied by negative effects. recessive. In a context of deterioration in the job market and morale of SMEs, as well as drying up of the consumption reserves of most households – with the exception of the wealthiest – such side effects could limit the support of such measures among Republicans.
Above all, the drastic increase in the budget deficit that would result from the full application of Donald Trump’s program could come up against resistance from the bond market, like the phenomenon of Bond Watchers[1] in the 1990s. Between the end of 1993 and the end of 1994, the action of these bond investors opposed to an overly spending tax policy caused the American 10-year bond to soar, going from 5.2 to more than 8%. The Clinton administration was then forced to take measures to reduce the budget deficit. More recently, in 2022, the British government of Liz Truss encountered resistance from the bond market when presenting its draft budget. The British 10-year had jumped from 3 to 4.5% in a few days, leading to an intervention by the Bank of England and the dismissal of the Minister of Finance. We cannot exclude such a scenario in the United States, while interest rates have risen significantly in recent weeks, due in particular to the increase in the term premium – the additional return required by investors to hold a long-term bond.
Thus, after having largely decided the fate of the presidential election, the economy and the markets should continue to weigh on American political life. They could constitute the most effective counter-power to a policy of Donald Trump whose consequences are very uncertain.
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The opinions mentioned are those of the manager. They cannot in any way engage the liability of LFDE.
