The highly anticipated US election is largely resolved. In January, the Democratic candidate and former vice president under Barak Obama, Joe Biden, will be inaugurated as America's 46th president. The US House of Representatives remains in Democratic Party hands and Republicans are expected to maintain control of the Senate, resulting in a divided Congress.
Eric Lascelles, Chief Economist at RBC Global Asset Management, recently shared his analysis and economic forecast for the post-election period, including the impact on Canada, at an Association of Canadian Pension Management (ACPM) webinar hosted by RBC Investor & Treasury Services.
Here are Eric's top 10 insights:
Don't bet on polls
that rely on telephone
responses
1. Polling is proving unpredictable: Pre-election polls gave Biden a wide lead, but the actual results were much closer. The tight race rattled markets, reminiscent of Donald Trump's surprise win four years earlier. The lesson for market watchers: Don't bet on polls that rely on telephone responses to provide an accurate preview of US political outcomes.
In the future, predictions might come from natural language processing of social media platforms and econometric models that connect the performance of the economy and financial markets to election outcomes.
2. Markets react positively, in the short term: The Biden win has been a short-term positive for stock markets and bond yields and negative for the US dollar. It is possible that the stock market may have rallied regardless of the outcome — and positive COVID-19 vaccine news also contributed to the recent rise — but Biden is associated with fiscal stimulus, while a divided Congress limits extreme actions such as tax hikes.
It is also likely the stock market is just relieved to move past this period of uncertainty.
3. Democratic power is limited, but Biden can still get things done: The likelihood of a dividend Congress will limit the Biden administration's promise to push through a partial reversal of President Trump's corporate tax rate cut – to 28% from 21% — and to boost taxes on those earning more than USD 400,000 per year. A Republican Senate, in opposition, is also likely to want to constrain the size of fiscal stimulus.
Still, the president has powers and can impose or remove tariffs, and conduct foreign policy. In addition, we do not want to underestimate what Biden may be able to accomplish in a Republican Senate. As a moderate with decades of Senate experience, he may have a higher chance of passing major legislation.
4. Biden's economic influence longer-term: Biden's win is a mild economic positive longer term, given the prospect of more fiscal stimulus, a greater effort to control COVID-19, and more growth-friendly immigration and trade policies.
Tax increases, if eventually passed, and the prospect of additional regulations could be seen as negative but are considered less of a risk to long-term growth.
The Canadian and US
economies grow
remarkably in sync.
5. What's good for the US economy is good for Canada: The Canadian and US economies grow remarkably in sync. They are both developed countries with similar sectors that experience the same global shocks, but in reality, the US has a significant economic influence on its northern neighbour. For market watchers that believe a Biden presidency with a divided Congress will be modestly positive for the US economy, there is a high chance it will also be modestly positive for Canada.
6. Better cross-border relations: It is reasonable to expect better relations moving forward between the US and Canada, and some may argue they can only improve compared to the past four years. Democrats and Liberals have similar values on areas such as climate change and social issues. While Biden is not a pure free trade advocate, based on his Senate votes in the past, he is expected to be less adversarial with Canada.
While Biden is not a pure free trade advocate, he is expected to be less adversarial with Canada.
The US may also rejoin the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a free trade agreement between Canada and 10 other countries in the Asia-Pacific region.
7. An aligned COVID-19 strategy: Biden's stance on how to fight COVID-19 is more aligned with Canada's, which is evident in his willingness to regularly wear a mask in public. Similar COVID-19 control strategies could allow an earlier Canada-US border re-opening, which would be positive for the flow of goods and people, and help many Canadian businesses recover. While we cannot expect to be freely crossing the North American border anytime soon, it is something to watch for in the coming months.
8. Canada could lose some of its competitive edge: The expectation that taxes will not rise in the US in the near future may make it more attractive for Canadian companies to consider moving operations south of the border. Overseas companies may also cite lower taxes as a reason to set up in the US versus Canada.
A weaker US dollar under a Biden administration could also reduce Canada's competitiveness.
9. Stronger environmental focus impacts Canada's energy sector: The Biden administration has vowed to re-enter the Paris climate agreement and be more aggressive with policies to cut greenhouse gas emissions. Biden has also pledged to revoke permits for the US portion of the long-delayed Keystone XL pipeline project, seen as a negative for Canada's oil and gas sector. On the flip side, a hawkish regulatory approach to US domestic oil and gas production could improve the relative attractiveness of investment in Canada's energy sector.
Canada has
set ambitious
immigration
targets for the
next three years
10. More open US immigration could drain Canadian talent: The Biden administration is expected to be much more open to immigration, making it more competitive for Canada to attract and retain talent. Canadian companies were perceived to have benefitted from Trump's immigration restrictions over the past four years, particularly in the technology sector. The anticipated policy shift south of the border comes just as Canada has set ambitious immigration targets for the next three years to make up for a dramatic COVID-19 related drop.
Final word: Expect fewer, if any, political fights, trade battles and overall tensions between the US and Canada over the next four years (as compared to the past four) and alignment on COVID-19, climate change and social policies. Near-term relations between the two nations will also depend on the outcome of Canada's next federal election, which will be held on or before October 16, 2023.