Trump blames Iran war for midterms losses

Following the Democrats' sweeping victory in the US midterms, the former president Donald Trump's status as a "lame duck" president is set to have significant implications for global economic stability. The initial drop in stock markets, followed by a recovery, indicates that investors are sensitive to political uncertainty and potential chaos. However, Trump's acknowledgement of the impact of the Iran war has been seen as a positive factor.

Chief economist Holger Schmieding of Berenberg noted that the result demonstrated that US voters had rejected Trump's authoritarian tendencies towards crony capitalism, highlighting the effectiveness of US institutions with their checks and balances. The outlook for stock markets, inflation, and economic growth remains contingent upon the Iran war and the advancement of artificial intelligence.

AI regulation and datacenter rollout policies by the Democrats could raise concerns about the growth driver of stock markets. However, there are also fears that Trump might take a more aggressive stance in foreign policy post-midterms, potentially intensifying the conflict with Iran. This could lead to a surge in energy prices, exacerbating global inflationary pressures.

The US economy is expected to face higher inflation rates, with the International Monetary Fund projecting global headline inflation to rise to 4.7% in 2023. Central banks, including the US Federal Reserve, the Bank of England, and the European Central Bank, are anticipated to raise interest rates in response to these inflationary pressures. This could put further strain on countries with high public debt levels.

The political gridlock in Congress, following the loss of control by Republicans, may hinder the implementation of new tax and spending measures. This could limit fiscal stimulus to boost the economy, while simultaneously curbing further borrowing and debt accumulation. The uncertainty surrounding AI investment and potential regulatory clampdowns by Democrats may also impact US economic growth.

Despite these challenges, investors remain wary of the potential for a slowdown in US growth, attributed to political gridlock and the drag of the Iran war. The scale of AI investment, which has contributed to global economic growth, may become less predictable under the changing left-right political dynamics. Additionally, environmental and social impacts of AI are increasingly being considered as important factors.