Trump 2, Act I - Inconsistency, inflation and instability. The mid-term elections represent the unmissable event for the American electorate who wishes to express their consent or dissatisfaction with the economic policies adopted in the last two years. The first part of President Trump's mandate can be summarized with what we will call the "3 I's": inconsistency, inflation and instability. The measures and decisions introduced to combat inflation have been inconsistent. This resurgence of inflationary pressures has led to a substantial increase in the cost of living and greater volatility in the macroeconomic cycle. The level of economic activity observed during this first part of Donald Trump's mandate is, on average, 0.6 percentage points lower than that recorded during the Biden administration. Furthermore, Donald Trump has made, more than ever, a series of U-turns that have contributed to reducing investors' visibility regarding the economic and financial situation. These “three Is” come at a price: the potential loss of control of the United States Congress, which until now has been under the exclusive control of the Republican Party.
Trump 2, Act II - the extent of the defeat as a key indicator to evaluate the progress of the second half of his mandate The mid-term elections represented, for the most part, a moment of political change and coexistence. However, it is unusual for an election of this importance to see such a strong consensus emerge around an expected defeat. The probability, as indicated by the markets, that the Democrats will regain control of the Parliament is between 70% and 90%. The Republican Party will, without a doubt, lose the House of Representatives and this outcome is now a foregone conclusion. However, there is far greater uncertainty regarding the future political composition of the Senate. As a result, two scenarios serve as working hypotheses: either a landslide victory for the Democrats will sweep Congress, or the Republicans will manage to retain the Senate with a slim majority. We immediately exclude the scenario of a violent challenge to the results by the executive, as happened in 2020, for the simple reason that President Trump will remain in office. In the short term, the macroeconomic impact of the elections will likely be practically nil. The outcome of the mid-term elections is unlikely to slow down the US economy, characterized by resilience and a recovery in the manufacturing sector. Difficulties are likely to arise during discussions on the debt ceiling and budget bills in 2027.
A blue wave: a landslide victory for the Democrats could drastically limit President Trump's room for maneuver. Without a majority in either chamber, his role would be confined to trade and foreign policy issues. Donald Trump could however use the veto to block political proposals that conflict with the measures he has introduced so far. However, an extensive use of this veto power could prove harmful to American democracy and the Republican Party by 2029. Strengthened by this majority, the Democrats will try to change the direction of the financial laws by scaling back tax cuts (it is not possible to make changes to measures already approved) in favor of an increase in social spending. From the point of view of fiscal indicators, this scenario would lead neither to a worsening of the already substantial budget deficit nor to a significant reduction in fiscal stimulus. Furthermore, Democrats and Republicans seem to disagree on issues related to "data centers" and the resource consumption they entail. We believe, as in the case of customs duties, that competition with China on the technological front is a matter of national interest and that the spread of data centers will continue at a national level
Republicans limit the damage: If Republicans retain control of the Senate, resulting in a divided Congress, we believe the scope and frequency of institutional deadlocks could be more significant than those seen during the first half of the current legislature. Given the current polarization between the two camps, shutdown episodes, such as the one observed in the fourth quarter of 2025, would become more frequent and weigh on the economic outlook of the United States. By the end of 2025, government consumption had fallen 5.7% on an annualized basis, subtracting one percentage point from U.S. growth. The resumption of public services in the following quarter did not fully compensate for the loss suffered. In addition to greater volatility in the macroeconomic cycle, this would lead to a gradual weakening of the stimulus provided by public consumption, which could translate into a reduction in support for aggregate demand. This environment would lead to greater volatility in long-term interest rates in light of the impending political clashes between the two parties and could also put on hold any potential cycle of Fed policy rate increases anticipated by the market (three expected policy rate increases over a twelve-month horizon).
