Global Daily – Another knife-edge US election, with big implications for the outlook

by: Bill Diviney

In what is our first daily insight of 2021, we take this opportunity to thank you for your support in 2020 and wish you a happy and healthy new year.

US Politics: Prospects improve for a Democrat-run Senate – Tomorrow, voters in Georgia will return to the polls in a runoff election for two Senate seats. The outcome of this election could mean the difference between massive fiscal spending in the US over the coming years, and more modest spending (our base case). The stakes are therefore very high. Opinion polls continue to suggest a tight race, and essentially a toss-up between Republicans and Democrats; the latest polls do show a slight edge of 1-2 points in favour of Democrats, but it is within the typical polling margin of error (+/- 3 points). With that said, early voting – by post or in person – so far suggests a higher turnout in Democrat vs Republican strongholds vis-à-vis turnout in November. Indeed, some 3 million voters have already cast their votes – this is around 60% of the total votes cast in November. The stronger turnout in Democrat areas so far does not necessarily mean a stronger turnout when all is said and done – President Trump’s disparaging of postal voting means that Republican voters are more likely to vote in person on election day than Democrats. However, it could also be that Republican voters are being discouraged by Trump’s continued allegations of electoral fraud; an opinion poll on 18 November showed that 67% of Republican voters believed the presidential election had been rigged. Republican voters could therefore be more likely to think their vote doesn’t count.

All told, the betting market probability of Democrats winning both seats – and therefore a slim majority in the Senate – has moved up to 48%, from a low of 25% on 21 December. This implies around a 70% probability of Democrats winning each of the two seats up for election (70%*70% = 49% for both seats). Betting markets therefore believe Democrats have a bigger edge than that implied by opinion polls. The market also seems to be judging that the Republican vote will be hurt by the leaked phone call recording over the weekend, during which Trump is heard pressuring the Georgian Secretary of State to ‘find’ enough votes for him to win the state in the presidential election. The probability of Democrats winning both seats has increased by 5 percentage points since last Friday.

Even a slim Democrat majority would be a game-changer for fiscal spending – Should Democrats indeed win both seats in tomorrow’s election, it would give them a majority of just one in the Senate (50 out of 100 seats, plus the vice president as a tie breaker). A majority in the Senate would mean Democrats controlling all three branches of the executive, giving it the power to pass bills without Republican support. However, such a slim Senate majority means that it would only take one Democratic Senator to rebel to bring down legislation. While this could happen with more contentious legislation for Democrats – for instance, on any potential trade deals, or actions to restrict monopoly power of big tech companies – it is unlikely to thwart policies that tend to unite Democrats, including the major spending plans of president-elect Biden (such as the $2trn renewable energy investment plan, or a follow-up to the recently passed $900bn pandemic relief package, which required compromise with Republicans in order to be passed). If anything, it could lead to even more spending, as Senators might make individual spending demands in return for their support. Our base case for the US currently assumes a continued divided executive, and therefore more modest spending that is constrained by the need for Republican support. Should Democrats win both Senate seats, higher expected spending would pose upside risks to our US GDP forecasts.