A weak President and a weaker dollar might turn out to be rather a positive outcome for the American economy, and indeed for the rest of the world.
I argued last week that the US and the world needed two things from the election: clarity and grace. We have grace – witness the measured and conciliatory comments by Joe Biden: ‘I will govern as an American President. There will be no red states and blue states when we win. Just the United States of America.’
Clarity? Well, the financial markets have decided that what looks in electoral terms a messy outcome would in economic terms be a satisfactory one.
The right outcome?: The markets have concluded that we will have a Democrat President in Joe Biden
Remember the saying of Franklin D Roosevelt: ‘It is the duty of the President to propose and it is the privilege of the Congress to dispose.’ The markets have concluded that we will have a Democrat President, a Republican Senate, and Democrat House, but one with a reduced majority – though we may have to wait until January for that Republican Senate majority to be confirmed.
The result for the economy is that it will be more difficult to get the next fiscal support package through Congress, but any loss of fiscal stimulus will be compensated for by more of a monetary boost.
The Federal Reserve committed itself last week to keeping the money taps open. Business will also benefit from a Congress that will be less inclined to challenge Big Tech, and less eager to curb the energy companies and the pharmaceutical giants.
There will presumably be some increase in taxation for wealthy Americans, but the Senate can temper that. So the American financial community has concluded that this is an OK result. Gridlock in Congress may limit the scope for radical initiatives but it also limits the possibility of radical mistakes. Assuming that’s right, what does this mean for us?
It means a weaker dollar. In the absence of more fiscal support, the Fed will have to keep pumping more money into the system. Some will flow abroad and that means the dollar bull market is over. It was probably over anyway, but this clinches it. We have become used to a sterling/dollar rate of around $1.30, but back in the middle of 2014 the rate was $1.70.
A cheaper dollar boosts US exports but it also boosts the economies of many emerging countries, whose currencies are linked either formally or informally to the dollar. Tougher for British companies to sell to the US? Sure, but offset by the wider boost to the global economy.
As for Britons who holiday in Florida, a half-decent exchange rate will be a welcome relief. There are further positives. Take world trade. Do not expect a Biden Administration to go easy on its dealings with China. Donald Trump’s reset of relations there will stick. The US will continue to challenge Europe on its restrictive trade practices and vice versa. But the tone will be different. It will be a more predictable America.
From a British point of view predictability would be most helpful: no repetition of that sudden imposition of a 25 per cent duty on single malt whisky. Whether a change in the Administration would affect the current trade talks with the UK is harder to call. My instinct is that won’t make a lot of odds either way. In any case UK trade with the US is trending upwards. With or without a formal deal we will, post-Brexit, find our economy aligning more with that of the US.
The consultancy firm Oxford Economics has done some sums on the impact of Brexit on trade patterns. Much depends on whether we do scramble some sort of deal with Europe, but it concludes that even if there is an agreement ‘the share of UK trade with the EU – which has been trending down for a lengthy period – falls further, towards levels last seen in the 1960s’. Instead, we trade more with America and the rest of the world and we buy more home-produced stuff.
There is a further point here: global trade is switching from goods to services. The US is the world’s largest exporter of services, the UK the second largest. On trade, our interests are aligned, whoever is running the show across the Atlantic.