This article first appeared in Forum, The Edge Malaysia Weekly on September 30, 2024 - October 6, 2024

Mexico used to be pitied because it was “so far from God and so near the US”. But in today’s closely inter-connected world, all of us are also “so near the US”. For good or bad, whatever happens in the world’s biggest economy and its most powerful nation will have tremendous implications for us in Asia. Whether it is the coming presidential election, how the US’ economy performs, what its central bank will do, how its dollar will move or how much oil it could produce — all these matter greatly to us.

Given the immense uncertainty, any judgement on what will happen has to come with a strong health warning. With that in mind, we will still say this: Even with many things possibly going wrong in the coming year, the US itself will probably muddle through as it has before. But the next year could be a rocky one for countries that are politically, militarily or economically dependent on the US.

The US’ elections are less than six weeks away and it remains anyone’s guess which way it will go. Even with an impressive debate victory, a growing economy, a well-organised campaign and a largely united Democratic Party behind her, Vice-President Kamala Harris is only dead even with the controversial former president Donald Trump — both in the national polling as well as in the key swing states that will determine the actual victor. Recall that it is not the candidate with the largest number of votes who wins but the one who carries the states with the biggest electoral college votes. On the two issues that are top of mind with voters — the economy and immigration — Trump has an edge. The fact that Harris is a woman of colour could also work against her among some segments of the electorate.

But Harris has some important things in her favour. She has raised a lot more money than Trump and is deploying that money assiduously, pushing targeted advertisements in the swing states that exploit her rival’s weaknesses. Her candidacy has also attracted tens of thousands of enthusiastic volunteers whose door-to-door canvassing and efforts to mobilise supporters to actually turn out to vote will be crucial to the election outcome. In addition, there is a special issue in this election — abortion. In 2022, the Supreme Court with the help of its three Trump-appointed justices overturned longstanding US law permitting abortion at the national level. That has sparked off a backlash against Trump among the many voters who support abortion rights. It is striking how the Democrats have consistently outperformed expectations in a whole series of state and national elections ever since that court decision — even in very conservative states.

If nothing goes wrong for Harris in the remaining six weeks, our best guess is that she will squeak through with a narrow victory. However, it is highly likely that her Democratic Party will lose control of the Senate, the upper house of Congress. In the best case, the Democrats may regain control of the lower house by a small margin but even this is uncertain.

Given the very high chance of a divided government, Harris will have to compromise with her Republican rivals in Congress and avoid major departures from current fiscal and regulatory policies. A Harris presidency will probably mark continuity with the Biden administration of which she is a part, with the differences being a matter of degree rather than a sea change. In recent years, Harris has demonstrated a strongly pragmatic streak and an ability to learn and adjust her policies.

For example, on relations with China, she will almost certainly continue with President Joe Biden’s careful and nuanced approach, which combines pressures such as trade and investment restrictions with the building of guard rails to ensure that competition with China does not escalate into a hot war. Her inclination will also be to work with allies in Asia and Europe to a greater extent than her rival for the presidency.

If Trump returns to the White House, there will be more turbulence. He is determined to expand his aggressive trade policy — he is talking about a 10% or maybe even a 20% tariff on all imports and a 60% tariff on Chinese goods. People are not taking his vow seriously enough. If there is one consistent theme in Trump’s thinking and one policy that he has very strong convictions about, it is tariffs. If he wins, one of the first things he will do is to impose these tariffs. There are no two ways about this — it will devastate world trade.

He is also much less supportive of the US’ security commitments in Europe and Asia, which would put Ukraine’s and Europe’s future at risk. Asian allies such as Japan and South Korea could also be shaken. He is determined to cut taxes and roll back some of Biden’s signature policies such as the initiatives to re-industrialise and decarbonise the US. The fiscal position and public debt will worsen greatly over time as a result. He also wants to deport millions of immigrants who are now a sizeable part of the labour force.

The think tanks that have studied the implications say that the US’ growth would slow while its inflation rate would rise as these policies are implemented. But the disruption to world trade and the uncertainty generated by trade wars would reduce global capital spending and trigger major slowdowns in China, Europe, Japan and the trade-dependent economies of the emerging world.

Remember first that the US economy has consistently defied the odds — predictions of a recession have fallen flat over and over again. We believe this will be the case again next year in our baseline scenario of political continuity. The US economy is likely to slow just a little in 2025 but still expand at a pace consistent with its long-term potential. That will help bring inflation down further.

There is a reason for this performance. For all this country’s top-down dysfunctionality — its gun violence, its partisan divisions, its awful fiscal policies and so on — the US’ strength has always been from the bottom up. Its companies are formidably efficient and its capacity for innovation unsurpassed. There is no other economy with a financial system as sophisticated and as capable of funding everything from start-ups to mature companies. It has an unmatched capacity to draw in brilliant minds and energetic entrepreneurs from all over the world. The US market is also so large that it provides economies of scale that most other countries can only dream of. At a time of extraordinary technological progress, it is this US ecosystem that will be able to harness those advances and turn them into economic prowess.

Thus, even if a second Trump administration causes economic turbulence as many observers fear, we expect the US economy itself to be relatively resilient. But there will be damage in the long term as we explain below.

As they campaign, neither presidential candidate is committing to fiscal responsibility. In a second Trump administration, taxes will be cut while spending will not be curtailed. Under Harris, spending on re-industrialisation, decarbonisation, healthcare and social services will rise while a divided Congress will make it difficult for her to raise revenues. Given the partisan divides, Congress is unlikely to check and balance administrations that play fast and loose with fiscal responsibility.

As we move into 2025, some of the provisions of the 2017 Tax Cuts and Jobs Act will expire. Given the political backdrop, key provisions of this act will be extended, causing budget deficits to widen sharply. As the rating agency Moody’s has said, the US is already hamstrung by “around US$28 trillion in outstanding federal debt, persistent large fiscal deficits of over 6% of GDP and net interest payments due on federal debt that will likely exceed US$1 trillion (around 3% of GDP) per year”. Looking ahead, Moody’s Analytics says the net public debt-to-GDP ratio will increase from close to 100% today to 116% in 10 years and 166% three decades from now.

So far, financial markets have not focused on the parlous US fiscal position and its implications for the US dollar. That is because markets are celebrating falling interest rates as the US Federal Reserve cuts rates, investors need US financial assets to hedge against global political and economic turbulence, and rivals to the US dollar such as the euro look unappealing.

But these are transient factors: As we argue below, interest rates will probably not fall as much as expected. Moreover, the eurozone economy may well recover by next year — the euro is already at a three-year high even before that happens. Once these supports weaken, the demand for US dollar assets will come under pressure. This will be accentuated if the US Congress is unable to agree on raising the US debt ceiling, plunging the US into political gridlock that would highlight to markets the dangers of political dysfunction in the US.

Under our baseline scenario of moderate growth, economic resilience and declining inflation, we see little need for the Fed to cut rates aggressively. In this case, we see two to three rate cuts of 25 basis points each next year after a maximum of two 25bps cuts in the remainder of this year.

Should a new administration pursue a policy of much larger fiscal deficits and sharply higher tariffs, it is likely that inflation risks would worsen. Bond yields would rise as investors price in a large volume of fundraising by the government. In that case, the Fed may hold off from cutting rates.

The markets are factoring in a much more aggressive pace of monetary easing and are likely to be disappointed.

Finally, and on a more positive note, one of the most important shifts in the oil market in the past decade is the surge in US oil production and how this has helped to stabilise oil prices for the rest of the world. S&P Global sees US crude oil production expanding 500,000 barrels per day (bpd) in 2025, after growing 510,000 bpd this year, accounting for close to half of the expected growth in non-Opec oil production in these years. At the same time, forecasters are reducing their expectations of growth in oil demand next year, so the US’ production surge will help contain sharp spikes in oil prices.

Love it or hate it, the US is still the single most important factor in global politics and economics. A lot will hinge on the US elections. A Harris victory would probably mean continuity in US policies, a generally pragmatic approach and a more predictable administration.

Should Trump return to the White House, however, two things that Asians highly prize — free trade that permits access to markets such as the US and the stabilising power of American security guarantees — will be at risk. Given Trump’s likely fiscal policies, there is also a higher chance that financial markets will no longer remain blasé about the US public debt position — which could bring greater financial instability.

Whatever it is, our region has to prepare for a bumpy ride.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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