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Setback for Donald Trump: The Democrats regain the majority in the House of Representatives. Trump’s Republicans, however, are expanding their majority in the Senate. An overview of the possible consequences.

In the congressional elections in the US, the Republicans of President Donald Trump have lost control of the House of Representatives. At the same time, however, the Republicans expanded their majority in the Senate, the second chamber of the Congress. Economists said in Wednesday’s first reactions to the economic consequences:

„While the opposing majorities generally result in political stalemate in Congress, the impact on stock markets is more likely to be positive: Historically, stocks have performed well when Congress was divided, and we expect this pattern to repeat itself.“ said Torsten Slok, chief economist at Deutsche Bank.

It is still too early to predict how it will go on politically. For the markets, it is important what happens in terms of trade, health, immigration and taxes. Taxation plays a role in the issue of government bonds and the long-term development of interest rates.

„The election result has made new fiscal stimulus unlikely in the next two years,“ added Christiane von Berg from Bayern LB. Therefore, the momentum of the last tax reform is likely to continue to bear the US economy until the spring of 2019, after which, however, the economic momentum should lose momentum. „On the one hand, a split Congress increases the likelihood of heated budget negotiations and the threat of a government deadlock, and on the other hand, US trade and foreign policy does not change, as it is designed solely by the president.“

Further tax cuts unlikely

„It will be uncomfortable for Trump, but I do not expect improvements in Europe in the dispute over tariffs and military spending,“ said Ifo President Clemens Fuest. The Democratic majority in the House of Representatives has three consequences. First, Trump will not be able to enforce any further tax cuts he plans. Second, in March 2019, the upper limit on government debt must be increased. The Democrats could call for action to reduce the budget deficit, so possibly tax increases. All this means that the debt-financed boom in the US could end faster than previously expected. Third, the Democrats will put pressure on Trump with committees of inquiry. They can not really overthrow the president because the Republicans dominate the Senate.

Aggressive against Europe and China

In principle, Democrats like Trump would be interested in launching an investment program for US infrastructure. That could be a joint project. „But the Trump Democrats will hardly allow such a success, so that’s probably not going to happen,“ said Fuest. In trade policy, little will change.

It could even be that Trump is even more aggressive towards Europe and China, to distract from the fact that he is under pressure from domestic politics and can not move much.

Government Shutdown could become reality again

„From now on, Trump will be made much harder to govern, and his fiscal agenda with tax cuts and increased spending on armaments and a wall facing Mexico will hardly continue as it has been,“ says Thomas Meissner of LBBW. On the contrary, there is a threat of further stagnation for the next two years, not only in the figurative sense, but also quite literally. A ‚government shutdown‘ could become a reality again if the Democrats are stubborn in the upcoming budget discussions. The Republicans in Parliament, in turn, could either try to break away from Trump or fiercely gather around him. “

„The big problems of the US will hardly touch this congress“

„The result is a clear draw without major consequences for American economic policy or for financial markets,“ says Holger Schmieding, chief economist at Berenberg Bank. „The two Houses of Congress are blocking one another, and it is based on a policy of least common denominator, and there will be no major initiatives.“ The country’s big problems – healthcare, Medicare, and the ballooning state deficit – will be hard on this Congress There will not be any decisions and Trump can continue its economic policy with some further deregulation. “

„For us, the election result does not breathe a sigh of relief in the trade conflict with the US,“ says Jörg Krämer, chief economist at Commerzbank. „If Trump can act less domestically in the future, then it is not excluded that he will be all the more decisive in the area of foreign trade policy – where he has a large free hand – and thus compensate for the lower options for action in domestic politics and Europe in the Trade Conflict have not declined, they have actually risen somewhat more. „