Analysis of UK and US election scenarios

Halfway through a historic year for elections around the world, Morgan Stanley’s chief economists assess the impact of recent results on the global economy, and weigh potential effects from key elections to come.

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Seth Carpenter: Welcome to Thoughts on the Market, and welcome back to the second part of a special two-part episode of the podcast. We've been covering Morgan Stanley's global economic outlook as we look into the third quarter of 2024. In the first part, we covered the twin themes of inflation in central banks. In this part, we're going to look at elections, with my colleagues Ellen Zentner, our Chief US Economist, Jens Eisenschmidt, our Chief Europe Economist, and Chetan Ahya, who is our Chief Asia Economist.

It's Monday, June 24th at 10 am in New York.

It is astounding if we look around the world just how many elections there have already been this year and how many more there are going to be. We will get to the US, but before we do, Chetan, in Asia, India is one of the most important economies; and in India they recently had elections. Can you just let our listeners know basically what happened and what do you think are the implications for that election for the Indian economy?

Chetan Ahya: Yeah Seth. So Definitely there was a big change in India in terms of the political outcome. So the ruling party did not get the full majority and they have had to form a government under a coalition structure. There is a question though, as a result of that, whether the policy shift will happen in India and the government will go back to redistribution instead of focusing on boosting investment and jobs. 

Well, we think that, you know, there is no change. There is policy continuity. We think that this government is very much aligned in thinking that they want to keep inflation in check and current account deficit in check, i.e. macro stability should be in control. And they still believe that job creation is the way to ensure that the general masses and the bottom 20 per cent see the benefit and then vote for them back again.

So, for us, we are not changing our view that this is India's decade. We are still maintaining our growth forecast that India will be achieving 6.5 per cent until 2030, and at the same time as India continues to build this growth rates on a high base, India will be at $8 trillion by 2032. Back to you, Seth.

Seth Carpenter: Thanks, Chetan. super interesting. And EM elections have had a lot of surprises. We had South Africa. We had a surprise -- in terms of the margin in the opposite direction of what you said for India -- when it comes to the case of Mexico, where Scheinbaum won, but the majority was even bigger than I think most people were expected.

But there are other elections that had some big surprises. Jens, let me come to you. In Europe, we had the European elections, and there were some big surprises there, to say the very least. First, can you just walk us through, what do the European level elections mean, in terms of our outlook? And then, part of the fallout from those surprises was that President Macron in France called for snap elections. What do you think we need to take away from that fact?

Jens Eisenschmidt: We have had a look at the manifestos, what is known so far from those that are competing for government in France, say, and I think one of our key takeaways is that might be more fiscal spending. And of course, short run this might get you more growth. But of course, the question is always, what's the price for us to pay? There might be higher interest rates and that in the longer term may be detrimental. So, I think overall we have to wait until we see really and observe the full election outcome.

Now, more generally, we had the European elections and we get a lot of questions by clients -- what the implications are here. Now, if you, sort of just look again from very high up, far away, then we see that the coalition that has last time, voted and elected, Ursula von der Leyen, the currently sitting, President of the European Commission. That coalition still stands or commands a majority in the European Parliament post the elections. Just that that majority, of course, is a little bit smaller than before.

It's very likely that von der Leyen will have to reach out to either the Greens that were not in the past part of her coalition, voting for her; or the bloc around the Italian Prime Minister Meloni. The implication of it is that we have to see which side the reach out is for – for the consequences for the commission priorities. But I would say from today's perspective, and again giving that there is some logic of averaging here, it's very unlikely to be dramatic changes that we are going to see at the European level.

Seth Carpenter: Staying on, on your side of the Atlantic, of course the UK is going to have elections as well. And notably on July 4th, the anniversary of the US independence from Great Britain. I love that timing. What's the story with the UK elections and are they going to change at all, your team's outlook for what goes on in the UK?

Jens Eisenschmidt: So on current polls, they were remarkably stable. There seems to be a change in government in the making, say. The Tories, the Conservative Party in the UK, it's very likely to have to give away power to a new labor government. That's essentially what polls currently suggest.

Now, we've had a look at both manifestos, and there are differences here and there. Typically, you would think, there's a bit more fiscal spending coming out of one government and the other. But, you know, if you really sort of compare notes and if you also see the constraints that both contenders -- conservative or labor -- would have to work with, it's hard to see a material difference, at least for the growth outlook, from their policies.

Again, it's early days. We will have to see what exactly then will be implemented after July 4th. But from today's perspective, it's hardly a game changer.

Seth Carpenter: Okay, great, thanks. I want to bring it back to this side of the Atlantic, back to the United States. Ellen, Morgan Stanley Research put out a big piece last week about the US election scenarios. Can you just run us through the key points there, because I will say, everyone around the world looks at the US election and has to take some notice.

Ellen Zentner: Ah yes. I love elections. I thought you'd never ask. So, in the US it's not just about Biden versus Trump. The outcome for the Congress matters critically for fiscal outcomes as well. So, broadly for deficits, we see a rank ordering of a Republican sweep leading to the biggest deficit expansion. Then a smaller deficit with a split government because there will not be unity to get things done. And then the smallest deficit comes with a Dem sweep because we do think that tax increases could be meaningful.

Seth Carpenter: Okay, whoa. Let me stop you there because it sounds like if we've got this rank ordering of how much the deficit expands, can we just take that and then translate it into a forecast for economic growth? So bigger deficit, more fiscal boost; smaller deficit, less fiscal boost; smallest deficit, sort of weakest growth. Is that the way we should think about this fiscal plan translates into projections of growth?

Ellen Zentner: Okay, I wish it were that easy and I know you're asking that because it would definitely poke me a bit. So, there are other policies that are going to matter. So tariffs, for example, and they're likely to differ substantially. So, you know, former President Trump has talked about 60 per cent tariffs on Chinese imports and 10 per cent tariffs broadly on global imports. And there are specifics that are hard to forecast now. Some of the broader plans might require congressional action; but what we learned from 2018 is that there is some inflationary impulse. But you can have a meaningful adverse hit to the economy from tariffs, and then that tends to have a pull on inflation thereafter. So, you can't just take the fiscal deficit, as a direction for growth.

And as I noted earlier, immigration has been a key part of the macro story in the US for the past year. I promised I would come back to that. You know, you've got, wildly different scenarios for immigration, depending on the congressional makeup and depending on who's president, as well. So, if I just take you to the most extreme example. So if you could see, immigration scenario under former president Trump, where he's talked about shutting down the border, and also deporting unauthorized immigrants that are already here. You know, you could damage the potential growth rate of the economy that would be slower.

To put it into numbers, the extreme version we published would result in a break even for non-farm payrolls going to 45, 000 from our current estimate of around 250, 000. So that would be a big shift. And I think immigration, rather than just the size of the deficit, is probably going to be one of the bigger things to watch out of the election.

Seth Carpenter: So as the saying goes, elections have consequences, not just in the United States, but around the world.

All right. Ellen, Chetan, Jens, thank you so much for joining today. And to our listeners, thank you for listening.

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