Talking Point  

Democratic win and trade war could cause US recession

Democratic win and trade war could cause US recession

The US economy is unlikely to enter a recession in 2020, but a Democratic victory in the impending US general election could significantly exacerbate the US economy, warned experts. 

Americans go to the polls on November 3 2020, and commentators have mixed views on what the ramifications of a Trump versus a Democratic win will entail. 

Christopher Peel, chief investment officer at Tavistock Wealth, said: “The US elections are very important because of the pro-business and pro-growth policies implemented by President Trump.”

He warned: “A Trump victory will extend the bull market for another one to three years, adding another 15 per cent to 20 per cent to the current bull market.

“A victory for the Democrats, especially Elisabeth Warren, would end the bull market instantly, causing a 15 per cent to 20 per cent correction.”

Anthony Willis, investment manager in BMO GAM’s Multi-Manager team, said:  “Markets like certainty and despite all the noise, President Trump is arguably a market-friendly president.”

The US, the world’s largest economy, has come under greater scrutiny by markets in the past year due to rising trade tensions with China. 

Both countries showed signs of reaching a trade agreement in recent months but Mr Trump has suggested that a trade agreement may take place only after the 2020 US election. 

Another round of US tariffs on $156bn (£119bn) of Chinese exports is due on December 15. 

Mr Willis said: “A trade deal of sorts before the US election still seems likely, but is unlikely to be a deal of significant substance, but enough to keep both sides happy; markets will take comfort in détente rather than further escalations.”

Tim Drayson, head of economics at LGIM said the trade war could tip the US economy into recession. 

He said: “We see around a 20 per cent chance of a US recession in 2020.

“This would most likely be triggered by an escalation of the trade war as we see little evidence of major private sector imbalances or overheating at present.”

While most in the industry stressed that there is some likelihood the US could enter a recession due to the trade war or a Democratic victory, they said any recession is likely to be a mild one. 

Robert Horrocks, chief investment officer and portfolio manager at Matthews Asia, said: “The real question is not whether there is a technical recession in the US or not, but whether it is going into a period of slower growth.”

Mr Horrocks added if there were to be a recession it will be “mild enough to, under normal circumstances, be offset by traditional stimulus methods”.

Mr Willis said: “Overall the data is not yet indicative of an economy heading towards recession.”

But he stressed the  other risk that could push the US into recession is a policy error.

“The most likely cause is normally Federal Reserve over-tightening though in this cycle the Fed has been swift to cut rates,” added Mr Willis.