Best case scenario for world growth: Biden wins it – UBS

Written by Ciaran Ryan. Posted in Journalism

But Trump has defeated the odds before. From Moneyweb

A Biden win would also be good news for China, though he is unlikely to revoke tariffs imposed under Trump. Image: Micah Green, Bloomberg
A Biden win would also be good news for China, though he is unlikely to revoke tariffs imposed under Trump. Image: Micah Green, Bloomberg

Two events could have a major impact on world economic growth: the availability of a successful Covid vaccine and the outcome of the US presidential election.

A Democratic Party sweep, with Joe Biden as the new US president, is the optimum scenario for global growth, says a report out this week from UBS.

It could mean an extra percentage point growth for the world in 2021. In that scenario, global GDP growth could hit 6.2% next year, against 5.2% growth if Donald Trump wins and the status quo prevails. That growth momentum would carry over into 2022, with world GDP growth holding steady at 5.2% under a Democratic administration.

The outcomes for a Trump ‘status quo’ win and a Congress divided between Republicans and Democrats are similar, with growth likely to be about 5.2%.

Fiscal stimulus

UBS says the US election outcome will determine the extent of fiscal stimulus. A Biden win is likely to be accompanied by a $1 trillion fiscal stimulus packaged focused on Covid relief, with a further $500 billion to make good on Biden’s campaign pledges. Though Biden has promised to increase taxes, UBS assumes these will get delayed.

Lukman Otunuga, senior research analyst at broker FXTM, agrees that a clear Biden win, where his party retains control of the House and wins the Senate, seems like the most positive outcome for markets.

“Such a result will open the doors to a round of large-scale fiscal stimulus that could nurse some of the damage Covid-19 has inflicted on the US economy. Should Biden win with Republicans retaining the Senate, this may reduce the odds of a larger fiscal stimulus and could be less positive for global risk sentiment.”

But Trump has defeated the odds before.

In 2016, the polls had Hillary Clinton easily winning the presidential election. Something went horribly wrong with the polls. Could it happen again?

Otunuga says a Trump victory will certainly catch markets by surprise and prove the polls wrong again.

“Although this outcome may result in a smaller or even delayed fiscal package, the policy continuity from his re-election could send stock prices higher over the medium term.”

UBS says the discovery of a successful vaccine is another factor likely to have a major impact of global growth. In an optimistic scenario, a vaccine with a high efficacy rate is found by the end of 2020, and production ramped up sufficiently to inoculate half the world’s population.

“This results in growth of 6.1% similar to a Democratic Party sweep. The pessimistic scenario assumes the approval of an effective vaccine is delayed until the of end 2021,” says UBS.

Trade

A Biden win would also be good news for China, though he is unlikely to revoke tariffs imposed under the Trump administration. Biden may look to use multilateral agreements to limit China’s trade practices if they are believed to be illegal and unfair. He is likely to focus on environmental rules, intellectual property violation, steel dumping, World Trade Organisation rules and human rights violations.

Biden is likely to support ‘fair trade’ rather than free trade policies.Read: China’s growth story isn’t what it seems

Biden will also recommit to the Paris climate agreement renounced by Trump, and sign on to net carbon neutrality no later than 2050 with emissions free electric power by 2035.

On fiscal policy, Biden will likely raise federal spending by $7 trillion over 10 years, with a ‘Buy American’ agenda, including spending on infrastructure, buying US-based goods, US research and development, housing, education, social security and healthcare. He has proposed an infrastructure bill with an initial spending of $1.3 trillion, rising to $2 trillion to include spending required to meet his commitments to climate policy.

Read: Global warming trends prove ‘enormous challenge’ of meeting Paris climate goals – WMO

From a commodity perspective, the biggest difference between Trump and Biden appears to be the green policy agenda which could lead to big changes in commodity demand (positive for green commodities like copper and battery raw materials, and negative for fossil fuels).

There would be an even greater shift towards decarbonisation if Biden wins.

“In addition, a Biden victory could suggest a more predictable policy environment, albeit not necessarily a de-escalation in the trade tension,” says UBS.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.