CREFC AC 2020: Biden’s economic reforms will be curbed if Republicans hold the Senate

A Biden presidency’s ability to implement a progressive Democrat agenda would be stifled if Republicans retain control of the Senate, delegates at the opening economic panel at CREFC Europe’s virtual Autumn Conference heard the morning after election day in the US.

Speaking last Wednesday morning, Sabina Kalyan, Global Head of Real Assets Research, CBRE Global Investors said the US electorate appears to have returned a divided government. However, Biden’s legislative ambitions for a reversal of Trump’s corporation tax cuts, a redistributive economic policy with sweeping labour law changes, a new Green Deal to shake-up environmental regulations as well as a new infrastructure plan will be restricted.

The opening panel discussion on the economic landscape, moderated by Richard Croft, Executive Chairman, at M7 Investment Group, also discussed global trade, including a UK-US trade agreement, Brexit and Covid-19. 

“If Biden wins with what looks to be a divide between the House and the Senate, you just can’t say as much about going through,” continued Kalyan. “It feels a bit more like the status quo with a sort of a centre-left slant. From an economic perspective, the two outcomes are probably not that radically different.

James Knightley, chief international economist, ING, said: “The House Democrats are certainly still going to push ahead with a very fiscally expansionary policy. But, of course, the Senate Republicans are going to say no.”

Knightley said, under a Biden presidency with Republican control of the Senate, Republicans could “put their Tea Party hats back on and suddenly become fiscally very conservative once more” and may pivot to an obstructionist stance. “There is still room for compromise with some of the more moderates within the Republican Party. Overall, I would still say Biden with a Republican Senate is more pro-growth than a second Donald Trump presidency would be.”

Subsequent developments indicate that the race for Senate control will be decided by two run-off Senate election, both in Georgia, in January. Biden, now on course to reach 306 Electoral College votes, has confirmed his four top priories: Covid-19, the US economic recovery, climate change and racial equity.  The Biden administration aims to re-shore critical supply chains “so that we aren’t dependent on other countries in future crises”, according to the Biden-Harris transition website. Biden plans to build small-business-led supply chains to create millions US-based manufacturing and technology jobs.

US global trade policy: reset under Biden?

The significant divergence between Biden and Trump will be on trade. “We know Joe Biden is much more of an internationalist,” explains Knightley. “We know he is far less likely to be aggressive with China and Europe. To give an example of this contrast, Peter Navarro, Donald Trump’s trade adviser, says the US does not try to work with Europe because he says, ‘we can’t trust the Europeans. The Europeans are in the pockets of China’. And he cited Italy embracing China’s Belt and Road initiative. 

“If you have that mentality gone from the White House, I think you can get an interesting dynamic of Europe and the US aligning, to put China under much more pressure to deliver on issues such as intellectual property and trade practices. It would deepen the relationship once more between the US and Europe.”

Kalyan adds: “Biden believes in international institutions, in the mechanisms of negotiated settlement which are important for international trade and clarity, the rule of law and economic stability. But ultimately world trade depends on global economic growth, so what will underlying growth look like under whatever his economic policies turn out to be, such as on the US’ propensity to import and export?”

Tougher outlook Brexit and US-UK trade agreement

There are enormous implications for Brexit. On the one hand, Boris Johnson’s relationship with Donald Trump is strong, and Trump is pro-Brexit has suggested that he respects the Brexit deal, but regrets it. Ultimately the negotiation of a US-UK trade agreement with a Biden administration may be more challenging and a lower priority for the UK government. Kalyan, however, did not believe that either presidency would materially influence the UK government’s exit from the EU – with or without a Brexit deal. 

By contrast, Knightley suggests that a Biden presidency does put “a little bit more pressure on” specifically about the Northern Ireland border issues. Biden believes the US are the arbiters of Good Friday peace agreement and he would not stand for any deal which puts that into jeopardy, such as any barriers in the island of Ireland. Any attempt to do so would likely lead to no talk on US-UK trade, reasons Knightley.

He continued: “On a US-UK trade deal, what does the US want? Under Biden and Trump, the priorities are agricultural and healthcare-related imports into the UK. The UK is saying no to both. So, I’m just a little bit wary that the US-UK trade relationship, whoever is president, is going to remain a difficult negotiation and the pressure on the UK is going to be intense. Moreover, just listening to the politicians, it’s always unnerving when they talk about trade as things you can physically see, but it is not anymore. Trade is so much more across different sectors – including within finance and real estate. Trade of physical goods is shrinking (as a proportion of total trade), and the fact that politicians mostly talk about this kind of trade is somewhat dismaying.”

The second national lockdown across England has raised the prospect of a double-dip recession across the UK and parts of Europe. While many of these national shutdowns are not as onerous as in the Spring, “they are still going to have a hugely damaging impact on economic activity”, Knightley said.

Knightley, who is based in New York, added: “The worry here is that over the last few weeks the US has been looking at what is going on in Europe quite complacently. Now, inevitably, the number of cases is rising in the US. Here, we spend more time inside bars and restaurants, Halloween was crazy here, and we have Thanksgiving coming up, which could be a catalyst for an increase in people travelling around the country. So, what is going on in Europe now is unavoidable in the US.

“You can imagine New York Governor Andrew Cuomo clamping down pretty hard, pretty quickly. And even if it isn’t as onerous as in March and April, consumers will still vote with their feet. So that narrative suggests the US is two to three months behind Europe, which could mean negative growth in December, January time, leading to a negative first quarter for the US GDP. 

“But once we get a vaccine that can lift sentiment and help to get the economy back to where we were. I still think we can get a decent turnaround. The December to January period is going to drag this quarter growth negative, but the second and third quarter can be very vigorous growth. And if you can get fiscal stimulus on top of that – fantastic.”

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