Australia | Nov 10 2006
By Chris Shaw
With the Democrats having regained control of both the House and the Senate following this week’s election in the US, the likely outcome in terms of new legislation is one of gridlock given the Republicans still have the Presidency with which to oppose Democratic initiatives.
While general economic wisdom is gridlock is good for financial markets, Morgan Stanley’s chief economists and global strategist Stephen Roach points out such an outcome may not be in the best interests of the US economy as a whole as it is facing challenges that need some response in coming years rather than two years of effectively doing nothing.
Top of Roach’s list is the ongoing poor savings performance of US households, which he notes is at a record low of 0.1% of national income. This means the US must import savings in order to keep growing its economy, which is resulting in the record current account and trade deficits.
The current account deficit now stands at about 6.6% of GDP, Roach noting this leaves the economy more exposed to currency and interest rate risks if foreign investors suddenly get cold feet in terms of putting more money into US assets. There is also the question of funding the retirement benefits of the estimated 77 million baby boomers about to enter their retirement time.
Roach also notes there is the potential problem of gridlock resulting in a slowing in the pace of economic activity, as the passing of legislation will be more difficult given the new political climate. Any such slowdown in Roach’s view could put additional pressure on growth sensitive revenues, potentially worsening the structural budget deficit.
At the same time he sees potential for a more protectionist attitude towards trade to emerge during a period of gridlock, which won’t be of benefit to America’s international competitiveness given the country is facing new challenges as a result of globalisation.
Roach’s conclusion is the time is completely wrong for gridlock in the US political scene, as while this has previously been good for financial markets the likelihood it prevents necessary changes being addressed in coming years is very much a negative this time around.