By Steve Zeppa
Donald Trump will be the next president of the United States.
Democratic candidate Kamala Harris conceded to her Republican rival this morning (AEDT) after President Trump secured enough electoral college votes overnight to ensure victory.
As part of the election process the Republican Party regained control of the Senate and is likely to retain control of the House of Representatives.
With President Trump in the White House, Republicans (likely) to control both houses of Congress and a conservative-leaning Supreme Court, what can we now expect?
Prior to the election the QIC published a number of scenarios on the potential impacts on the US economy, depending which way the results fell.
They suggested if Republicans controlled the entire Congress, President Trump could implement his policy agenda in full, a scenario they labelled “Trump at Face Value”.
However, the QIC report suggested, even if Republicans controlled both the House and the Senate, it would be more likely that President Trump would be more measured in his policy approach, a scenario they called the “Republican Sweep”.
These are their insights:
Trump at Face value
This scenario would see President Trump with the political ability, will, and lack of logistical obstacles allowing the implementation the entirety of his policy program, including 60 percent tariff hike on China and 11 million migrant deportations.
Implications:
- President Trump’s proposals to deport millions of unauthorized immigrants, introduce widespread tariffs and cut taxes are very inflationary.
- The hit to growth is large and would likely cause a US recession, with the negative immigration & trade war shocks outweighing looser fiscal policy.
- Inflation pressures stemming from the supply-side shocks and concerns of a de-anchoring of inflation expectations will lead the US Federal Reserve to reverse course and raise rates to ~6 percent.
- Notwithstanding higher tariff revenue, President Trump’s proposed tax cuts (lowering the corporate tax rate from 21 percent to 15 percent) are unfunded and will lead to a further deterioration of public finances.
- US 10-year government bond yields are expected to rise ~125bps compared to base, while the US dollar appreciates ~8 percent. Bond market pressure could be larger should President Trump undermine Fed independence or term premiums spike due to concerns over fiscal sustainability
Republican Sweep
President Trump implements proposed policies, but winds back the magnitude of tariff hikes on China from 60 percent to 25 percent and on other imports from 10 percent to 1 percent. Migrant program is curtailed to a 0.1 ppt p.a. lower population growth.
Implications:
- Growth and inflation impacts are much more muted under the assumed ‘Republican Sweep’ scenario due to more targeted tariff hikes and no large-scale deportations.
- Inflation is expected to be boosted by 10-20bps during President Trump’s 2nd term if Republicans Sweep Washington.
- The US economy would likely avoid recession, although growth is 20-40bps lower (vs base) over 2025-26. Growth begins to recover from mid-2026 as corporate tax cuts boost investment.
- Little impact on Federal Reserve policy over the next few years, although rates are likely to be higher over the longer-run due to looser fiscal policy.
- US 10-year government bond yields are expected to be ~50-70bps higher than base over 2025-26, while the US dollar appreciates ~3%
And what if the Democrats manage to take control of the House? The QIC dubbed this scenario the:
White House Switch
Gridlock in Congress prevents President Trump from delivering on many of his fiscal plans. President Trump extends the expiring tax cuts for both businesses and those individuals earning less than $400K. Debt ceiling debates lead to caps on discretionary spending.
Implications:
- A White House Switch is expected to lead to modestly weaker growth and a slightly higher inflation outlook than our base forecast.
- Growth impact caused by modest tariff hikes and lower population growth, which outweighs the impact of slightly larger tax cuts.
- Near-term economic impacts will be heavily influenced by the precise details of the tariff & immigration policies President Trump actually puts in place (many of which don’t require Congress approval) as well as the timing of the policies.
- Increased debate over the debt ceiling will emerge and an expectation Democrats will force spending cuts (similar to the 2023 Fiscal Responsibility Act) before agreeing to lift the ceiling.
- US Federal Reserve is expected to keep rates around 10bp higher due to the slightly stronger inflationary impulse, placing modest upward pressure on bond yields
As for the feelings in Canberra, this is the statement from Prime Minister Anthony Albanese:
I congratulate President Trump on his election victory.
The election of the President of the United States is always an important moment for the world, for our region and for Australia.
Our Government will work closely with the new Trump Administration to realise the benefits of our strong economic partnership.
The United States has long played a leadership role in the stability and security of the Indo-Pacific. Australia will strive to strengthen the co-operation between our two nations in the region.
Australia and America are old allies and we are true friends. Our nations are bound by a history of shared sacrifice, a commitment to common values and – above all – enduring respect and affection between our peoples.
I look forward to talking with President Trump and working with him in the best interests of both our nations.
