What the Democrats' midterms win means for the US economy and Trump

The Democrats' strong performance in the US midterm elections has significant implications for the US economy and policy, even with President Donald Trump still in office. Markets initially reacted negatively to the results, with global stocks and the dollar declining. However, the Democrats' control of both houses of Congress could lead to gridlock, as they still lack a filibuster-proof majority in the Senate and Trump retains veto power.

Stephen Brown, chief North America economist at Capital Economics, believes the election results indicate two years of gridlock. Jacob Funk Kirkegaard, from the Peterson Institute for International Economics, agrees, stating that there will be "complete 100% gridlock." Some investors are concerned that Democrats may push for AI regulation, particularly if they win the presidency in 2028. Kirkegaard notes that opposition to data centers, crucial for AI, helped secure Democratic victories.

If Democrats win the presidency in 2028, they could implement tax hikes on corporations and high-income individuals, as well as regulations that could delay AI rollout. However, it is unclear how they could force substantial change to Trump's tariff policies, which have been a key economic focus. President Trump is unlikely to moderate his stance, as he has consistently supported tariffs since his political career began.

While Congress cannot directly end existing tariffs, they can pursue legal action to prevent further escalation. Kirkegaard suggests that the Democrats' victory may force Trump to be less erratic in his policymaking, potentially leading to a deal with Iran that could lower energy prices and benefit voters concerned about the cost-of-living crisis. Despite the Democrats' broad victory, Trump's continued presence in the White House complicates efforts to alter economic policies.