Donald Trump wins presidential election
Donald Trump is back in the White House. Having secured a victory in the major battleground state of Pennsylvania, he has been declared the winner of this year’s highly contested presidential election. This makes him the first president since Grover Cleveland (in 1893) to secure two non-consecutive terms. Attention will now switch to the Congressional elections, which will determine the final balance of power of the US government. In the US House, at the time of writing, Republicans have won 191 seats, while Democrats have won 169 seats. We expect Republicans to gain control of the House, given their outperformance in the Presidential race (though with a small majority). In the US Senate, the Republicans have won a solid majority. They gained 51 seats at the time of writing versus 42 for the Democrats.
As Donald Trump is likely to face a Republican Congress, he will have an easier time passing his economic agenda (see also our research report of January). This agenda is likely to generate a stagflationary shock. The most damaging proposals are trade-related. Donald Trump proposes to raise tariffs to 20% on all imports and to 60% on Chinese imports. These plans will cause a major disruption to global trade. Though we expect the business community to tamper down some of his tariffs proposals, we still expect trade barriers to be raised substantially during his second term. His plans to limit migration will also generate a negative labour supply shock. He is not only likely to enhance border security and thus limit the flow of undocumented immigrants, but will also restrict legal migration. Furthermore, he is likely to ramp up deportations of undocumented migrants currently residing in the US, though he will face resistance from local (Democratic) government officials on this matter.
Deficit spending (in the form of major tax cuts) will probably partially counterbalance the stagnatory effect of his trade and migration agenda. His tax plans would increase the deficit by an estimated 4 trillion USD (14.6% of current GDP), according to the Penn Wharton Budget Model and to 7.5 trillion USD according to Committee for a Responsible Federal Budget. That said, this deficit spending will further drive up inflation and raise questions on debt sustainability.
Donald Trump’s reelection also raises the likelihood of other major risks to our scenario materializing. Geopolitical tensions will rise under his watch, as he will probably stop funding Ukraine and undermine the unity of NATO. His position towards Taiwan is also highly ambivalent. His staunch support of Israel could also push Israel to take stronger military action against Iran and its proxies.
His disrespect of institutions is also an important economic risk. In particular his criticism of the Fed risks undermining the independence of this critical institution. In 2026, Donald Trump will have to replace the current Fed Chairman. That said, we still expect the Fed to maintain its independence over the course of Donald Trump’s term and act to counterbalance the inflationary effect of Donald Trump’s economic agenda.
Looking ahead at the calendar for 2025, Donald Trump will have to raise the debt ceiling in the beginning of the year. Given his majorities in Congress, that should not be a problem. By the end of 2025, Donald Trump’s 2018 tax cuts are set to expire. We expect them to be extended in Congress. Further ahead, midterm elections are already set for November 2026. As midterms always tend to be challenging for an incumbent party and Democrats have recently outperformed in non-presidential elections, we expect Democrats to recapture control of the House (though not necessarily of the US Senate). Never a dull moment in US politics!