Key messages:
•The US presidential election will be held on 5 November. A Trump or Harris win without their party controlling Congress are the most likely scenarios.
•This would limit the ability of the new President to implement major policy changes, except for tariffs.
•Under a Harris presidency, we would not expect additional tariffs. The biggest impact on economic growth and especially inflation would come via higher tariffs especially in the event of a Red wave.
•The impact for the USD and interest rates should be moderate in the event of a split Congress. In the event of a Red wave, the USD and interest rates would lead to upside over the medium term relative to our current scenario.
The election and possible outcomes
The US presidential election will be held on 5 November. A number of seats in the US Congress will also be potentially renewed and could lead to a change in majorities.
As chart 1 shows, the race is extremely tight at this stage, and the outcome may not be clear on the election night or immediately afterwards. Pennsylvania is probably the key state to watch among the “swing states” (Pennsylvania, Georgia, Michigan, Arizona, Nevada, Wisconsin and North Carolina). Extreme scenarios with a low probability, but high impact, could materialise if no candidate secures an Electoral College majority or if results are subject to legal challenge. Such scenarios imply that markets could face post-election uncertainty for several weeks.
The key issues related to economic growth and markets are:
1. Tariffs and trade
Whoever wins the US presidential election, the trend towards greater protectionism will remain. Trade barriers are one reflection of the broader shift away from the ongoing globalisation that has already led to higher tariffs and protectionism.
Under a Harris presidency we do not expect additional tariffs. We would, however, expect tariffs to be much higher under a Trump presidency. The extent of tariffs remains an open question. If we consider an extreme scenario, such as a policy of import tariffs of 10% globally and 60% on China, the impact on the US and the world economy would be quite substantial. The effect from the US imposing such tariffs on China would probably have a much larger and more persistent effect on inflation than on growth. The full impact on inflation would probably be seen later, in 2025 but the US central bank would probably be forced to stop cutting rates and even hike rates again. That would amplify the negative effect on growth, not only in the US. Whatever policy Donald Trump chooses could depend on the outcome of the elections for Congress. It is, however, very likely that the impact on the eurozone will be more negative if Trump wins. The recent business surveys in the eurozone, however, suggest that companies are expecting a negative outcome, and the current pessimism is probably exaggerated.
2. Fiscal policy, deficits and debt
The key issues are whether to extend the Tax Cuts and Jobs Act (TCJA) voted in 2017, which are scheduled to end at the beginning of 2026, and a potential change in the Federal Corporate Tax.
3. Immigration
Whatever the US election outcome, we think that the positive impulse from higher immigration on growth and the labour market is likely to fall gradually. A faster immigration progress is unlikely, given Donald Trump’s through stance on border issues and Kamala Harris’s focus on other priorities. Mass deportation is a key downside risk. However, the probability of such scenario is limited by border-control capacity constraints. Under the most likely scenarios with divided Congress, immigration should continue supporting growth even if the flow of new arrivals slows considerably.
The impact on the USD and US bond yields
A Red wave would lead to the biggest upside for the dollar in the medium term. As discussed earlier, such scenario would probably imply higher inflation and higher policy rates. A Harris presidency with a divided Congress would imply more downside for the dollar in the medium term, lead to less uncertainty about the economic outlook, and reduce the appetite for safer currencies. Inflation uncertainty would also fall and support the Federal Reserve in cutting rates and keeping rates low.
Bond yields are not expected to deviate a lot from our current outlook in the event of either presidential candidate winning with a divided Congress. A Red wave would lead to the highest upside risk for yields in the medium term as it would imply higher inflation and possibly higher policy rates. A Blue wave would suggest somewhat less upside for bond yields relative to our current outlook.
Conclusion
The race will remain very tight, and the most likely outcomes are either Trump or Harris winning but without having their party control Congress. This would limit the ability of the new President to implement major policy changes, except for tariffs. Under a Harris presidency, we would not expect additional tariffs. The biggest impact on economic growth would come via higher tariffs in the event of a Trump win. The main risk is a scenario with a policy of import tariffs of 10% worldwide and 60% on China. This should have a much larger and more persistent effect on inflation than on growth. The full impact on inflation would probably be seen later in 2025 and the US central bank would probably be forced to stop cutting rates and even hike rates again. That would amplify the negative effect on growth, not only in the US. Under a Trump – divided Congress, it is likely that the tariff changes would be more moderate. The impact of tariffs for the eurozone would be more negative under a Trump administration.
The impact for the USD, interest rates and yields should be moderate in the event of a split Congress. In case of a Red wave, the USD and rates have upside over the medium term relative to our current scenario.
