According to the Research Department at BBVA, the midterms elections are not a major upside or downside risk to the short-term economic outlook, but they point out that today’s election could defy all expectations and be remembered as the most important in a generation.
Key Quotes:
“Market volatility, rich equity valuations, inflationary pressures, a jolt of hawkish monetary policy and the length of the current expansion ratcheted up recessionary fears in the 3Q18. Based on empirical evidence and our judgement on the potential for imbalances within the U.S. economy, although the probability of recession within the next twelve months is edging up, it remains low. In fact, private domestic consumption remains strong while government consumption and investment is set to rise in response to the expansionary fiscal plans. In fact, we continue to expect above average growth in 2018 and 2019, but expect headwinds to start to accumulate in 2019, pushing GDP growth closer to potential thereafter. With growth above potential and ongoing labor market tightening, we expect the Fed to continue reducing the size of its balance sheet and normalizing interest rates at a gradual pace as long as inflationary pressures remain contained.”
“With the trade war intensifying, increasing policy uncertainty and the tailwinds from fiscal stimulus likely to fade we believe that risks are titling to the downside. That being said, a Democratic victory in the house could soften the administration’s agenda and potentially increase the chances of tackling infrastructure investment, a policy that traditionally has Democratic support and has the potential to buoy the president’s economic agenda. In addition, although a Democratic victory would imply a divided government, the outcomes could become more predictable and less extreme, which could assuage market fears and lower political uncertainty. On the trade front, the tepid investment from the private sector in response to the costs and uncertainty related to the tariffs could be reversed with a sound compromise between the U.S. and its major trading partners. Doing so could also reinforce the president’s chances of fulfilling his economic promises at a time when faith in the economic agenda may be waning.”
“In sum, the midterms are not a major upside or downside risk to the short-term economic outlook, but the 2018 elections could defy all expectations and be remembered as the most important in a generation. Extreme policies implemented in recent years in an environment of labor market disruption, demographic and cultural changes, and rising inequality, guarantees elevated levels of polarization, identity politics, and frustration with traditional institutions. If these trends persist, the breakdown of the political landscape is likely to have significant consequences on policy choices and economic performance in years to come. Therefore, moving away from trivial partisan warfare toward more balanced and consensus policies is more likely to boost the well-being for the vast majority of Americans in the long-run.”
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