Paul Diggle
Hello and welcome to Macro Bytes the economics and politics podcast from abrdn. My name is Paul Diggle, Chief Economist at abrdn.
Luke Bartholomew
And I'm Luke Bartholomew, Senior Economist at abrdn.
Paul Diggle
And this week our focus is on politics. Of course, it will not have escaped your attention that 2024 is an enormous electoral and political year bookended by Taiwan just gone and the US in November, but also with the likes of the UK, the EU, India and many others heading to the polls. So we're going to talk on this episode about some of the crucial economic issues at stake in these elections and why they matter to investors. Now, overarching, all these elections are I think unifying themes of political polarisation, geopolitical uncertainty, the changing nature of globalization. Some have called 2024 an acid test for democracy. So we're delighted to be joined by Lizzy Galbraith, Political Economist here at abrdn, to discuss all this. Welcome Lizzy.
Lizzy Galbraith
Thanks for having me back again, Paul.
Paul Diggle
So let's start Lizzy with Taiwan. Can you give us a very quick summary of the results to bring our listeners up to speed?
Lizzy Galbraith
Yes. So the pro-independence Democratic Progressive Party candidate William Lai won the presidential election. It's an unprecedented third term for the party. However, they lost their majority in the legislative. So the DPP have failed to win an outright majority there and that's going to temper some of the policymaking going forward. So what we've seen is really sort of broad continuity from the previous election to now. No really huge changes in terms of the political landscape in Taiwan.
Paul Diggle
So a lot was at stake in these elections. And not all of it is about the status of Taiwan vis-a-vis China, it's I think, important not to reduce Taiwanese politics down to that one single issue. I mean, that said, for international investors, we are principally interested in Taiwanese politics because of its implications for Taiwan-China-US relations. In that regard, then Lizzy, has this election increased cross-strait risk?
Lizzy Galbraith
So tensions are probably going to remain elevated in the short term, just because William Lai was probably Beijing's least favourite option when it came to the candidates available. But really, given that we've just seen one DPP president sort of move on to another DPP president, we've not seen any huge change in the relationship between Taiwan and China as a result of this election. Really, the bigger risk factor here is actually going to be the US election, which is probably going to be the main driver of potential risk in the region over the next 12 to 18 months. The US election, depending on what happens there, has the potential to introduce quite a lot of policy uncertainty, potentially inconsistency in how the US approaches its strategic ambiguity policy as well. And that's really the thing that we think could be the biggest risk factor going forward in this situation.
Luke Bartholomew
So just building on what Paul was saying there about the importance of US-Chinese and Taiwanese relations in terms of the global economy, of course, the real importance is of Taiwan as a chip producer within the global economy. It's a topic that we talked about back with Chris Miller last year in his book ‘Chip Wars’. But Lizzy, you were saying that perhaps the most important thing that's affected cross-strait dynamics or may do is the US election. We had last week, as we speak, the Iowa caucuses, which Trump won very handily. Ron DeSantis has left the contest. And as we speak today, it's the New Hampshire primaries, which Trump looks set to win, as well. So to ask the question bluntly, I mean, is there any chance now that Trump won't be the Republican nominee?
Lizzy Galbraith
I think absent all the polls being extremely wrong, no. It looks like he's really on a glide path now to the nomination. He's leading in all of the polling in all of the Republican primaries. It's unlikely we're going to get much further I think, unless Nikki Haley has a very surprising turnaround. And yes, I think we are moving to a situation where Trump is going to be the de facto nominee pretty shortly. We've also seen a majority of congressional Republicans already endorse him. So it really does feel like the Republican Party is now moving pretty firmly behind Trump as well. And he certainly retains a very, very strong level of support across the Republican primary base.
Luke Bartholomew
So the general election is looking therefore to be a repeat of the Trump-Biden contest of last time. What are the polls currently saying about how that contest will go?
Lizzy Galbraith
So at the moment, Trump holds a narrow lead over Biden in head-to-head polling at a national level and has done since November. Voters are particularly negative on perceptions of the economy under Biden, and they have quite a few concerns about Biden's age as well. Crucially, Trump is also polling very strongly against Biden in the six key swing states of Arizona, Nevada, Georgia, Pennsylvania, Wisconsin, and Michigan. Biden won all six of those in 2020 by extremely narrow margins. And those are the states to look for as Trump's path to victory relies on flipping at least four of those states back to the Republicans in the election this year.
Luke Bartholomew
Now, it's interesting you say, Lizzy, that there is this perception that the economy is a weakness for Biden. And it's certainly true that consumer sentiment and other competence indicators have been extremely weak over the last couple of years and indeed, had been running much weaker than actually the real economy has been given, you know, how strong growth has been, how low unemployment is. Some people have even called that the so-called ‘vibe-session’, this idea that it's not so much that the economy itself that's in recession, it's just that the vibes are extremely poor. I mean, it's also been quite frustrating for us as forecasters, because typically, consumer sentiment is seen as this forward-looking indicator, it tells you something about where the economy is going to go and the weakness of it has sort of implied that the economy is going to deteriorate. And that hasn't happened yet. In fact, most recently, we've seen that sentiment has picked up a little bit and is maybe starting to catch up with the strength of the economy. So perhaps there is the possibility that the economy having been a source of great weakness to the Biden campaign, could, as we get closer to the election become something of a source of strength. Of course, that does depend on the economy not falling into an actual recession, rather than a vibe-session this year. But let's assume it is Trump, who does win in November, and I'm sure this is a topic we will revisit and there's lots to say. But broadly speaking, what would a second Trump term mean?
Lizzy Galbraith
So based on what he said, so far, a second term Trump presidency would mean quite a big divergence from the policies that the Biden administration's been focusing on over the last four years. So particularly in areas like trade, Trump is proposing policies like a universal baseline tariff, he's proposed this to be around 10% on the majority of goods imported to the US. He's also proposed additional tariffs on countries that have unfair trading practices that negatively impact the US. So potentially some really volatile trade policies under Trump. Geopolitically, we'd also likely see a more hawkish approach to China. Not to say that actually the Biden administration has overseen a necessarily a huge improvement in US-Chinese relations, but we'd certainly go back and see probably a more volatile relationship with China and there may be a watering down of strategic ambiguity under a future Trump presidency as well, that would affect cross-strait relations, as we mentioned at the start as well. Trump is also more likely to pursue a potentially isolationist policy. In some areas, you may see the US be less inclined to intervene overseas. But we saw in his first term that sometimes they actually became more inclined to take military action as well. So there's potentially less reliability in US geopolitical strategy. Sometimes we may see them seek to end involvement as Trump has pledged to do in Ukraine. In other situations, you may see the US actually go beyond what has been the case under President Biden. On the fiscal side, we know Trump is very interested in not just extending the tax cuts that he introduced in 2017, but also potentially going further than he did during his first term. And that's going to be compounded and complicated by the increasingly limited fiscal space. But we know that Trump's instincts are going to be fairly high spend. He's not a particularly hawkish Republican when it comes to lowering US debt, it's not something that he's particularly interested in. So we're probably looking at more high spend instincts from Trump in a second term. We're also likely to see Trump actually take quite a radical approach to the structure and the function of governance as well. So potentially looking at taking regulatory agencies back under the direct control of the presidency, maybe having the FTC pursue antitrust policy less aggressively, and potentially politicising a lot of areas of the civil service as well. And that could lead again to quite a lot of policy uncertainty in the event of a second term presidency.
Paul Diggle
So all sorts of interesting potential implications of a second Trump term, no doubt, something we'll come back to on the podcast. But of course, the outcome of the election is unpredictable, polling is close, even if Trump has a lead at the moment. Somewhere, I suppose Lizzy, where the next election is looking somewhat more predictable, is here in the UK, both in terms of its electoral outcome, which obviously shows, at the moment, a strong lead in the polls for the Labour Party, but also, I think its policy and economic implications. Perhaps the unpredictable bit is the exact timing of a UK General Election, your H1, H2 This year, it could still even be very early next year. What's the latest in terms of when an election is likely to be held and considerations around that, but also, what current polling is saying about the size of any potential Labour majority?
Lizzy Galbraith
So the absolute last date that a general election could be called is the 17th of December this year, which would mean the election would be held on the 28th of January 2025. That's extremely unlikely, not least, because then the bulk of the campaigning would be happening over Christmas. And that's not something that the public or MPs particularly wants. So the two more realistic periods that are under consideration at the moment are May, that would likely coincide with the local elections, which are held on the 2nd of May, or mid-November, after the US election has been held. November is more likely, given that the current polling deficits, the Conservatives remain 20 points or so behind in the polls at the moment. And it's very unlikely that any meaningful change in the polls would be made in the event of the government going for a May election. So November would give the Conservatives more time to make some headway in that polling deficit. Although it's fairly unlikely that we'd see them wait right till the end of this session before they call that election.
Paul Diggle
Yeah, no one wants to be campaigned over Christmas. What would a Labour government mean then for the economy and for investors?
Lizzy Galbraith
So I think the big thing that we'd see is a shift towards a more interventionist industrial policy. So we're likely to see a Labour government change the fiscal rules that would allow more borrowing to fund infrastructure investments. We know that Labour wants to create an 8 billion pound national wealth funds and the targets that they've set for that is that for every pound that is spent through that, on infrastructure projects, they want to attract three pounds of private capital to co-invest alongside it. So the idea that Labour is sort of putting forwards is that you'd see a big increase in the amount that the state is spending on green infrastructure projects in particular, but they also want to see the private sector invest alongside the government to make sure that investment goes as far as possible, and to try and get around the very limited fiscal space that any Labour government would have to deal with. Labour's also looking at a number of other initiatives as well. So potentially taking the Mansion House pension reforms that the government is pursuing at the moment, even further, to enable pension funds to invest in some of these projects as well, as well as prioritising planning reform to speed up planning permissions for infrastructure projects and for housing as well. Where we're not seeing much change, potentially surprisingly, for a Labour Government, is that they've not actually pledged to spend much additional money on public services in the first half of a potential government. So all of the fiscal room is effectively being targeted towards these infrastructure plans with the hope that they can generate economic growth. And that can then be used to fund additional public sector support. But we're seeing them take a different approach to previous Labour leadership plans. And it's looking like it's heading more in a sort of Bidenomics direction than necessarily a Blair-style or a Corbin-style policy platform.
Luke Bartholomew
So another place where the election outcome is looking pretty predictable is in India. Now we discussed India on a recent podcast, it looks very likely that Modi will win a third term there, but what’s a stake do you think Lizzy in India's elections this year?
Lizzy Galbraith
So as you said, I mean, it's extremely likely that Modi is going to win a third term. His approval rating is currently 76%. And that level of endorsement is going to lead him to pursue largely the same economic and social policy trajectory in a third term. One thing that we know he's going to be focusing on is this made-in-India strategy his sort of key industrial policy that aims to boost domestic manufacturing. So we're seeing subsidies, tax cuts and investment into improving, you know, logistical infrastructure to enable all this to happen. So I think that's going to be a big focus of a third Modi term. But there are some risks around this as well, particularly Modi's tendency to lean into more protectionist policies as well. And we have seen Modi struggle, despite his popularity to get through some tougher reform agendas like labour reform. That's proved quite hard for him to actually complete in his second term and may also prove tricky in his third term, depending on the size of the parliamentary majority that he ends up with after this election.
Paul Diggle
And Lizzy the final location where we want to talk about elections then is in the EU. There are European Parliament elections in June. Now, the standard worry, I think that many investors have when it comes to European elections is of a far-right populist takeover. And those worries have been given some extra impetus recently by the success of Geert Wilders in the Netherlands, the AFD’s polling in Germany, and LePen’s support in France, but I wonder if that is all perhaps a little bit of a red herring, or at least there are clear counterexamples to that shift in things like the far right, being defeated electorally in Poland with Donald Tusk recently, or parts of the far right being hemmed in by European institutions being kind of forced to be more conventional by institutions and strategic realities. Meloni in Italy would be an example there. So what are your expectations heading into this European election? Should we fear a big far-right surge in Europe?
Lizzy Galbraith
So it is true that polling suggests that the right-leaning blocs in the European Parliament will make gains in this election. However, that doesn't necessarily mean that the meaningful power base in Parliament, particularly the Commission will change. So the centre-right EPP and the centre-left S&D blocs are still likely to be the two largest blocks in Parliament, and the EPP will maintain its current kingmaker sort of position as the largest grouping in the European Parliament, Now they have a preference for a fairly centrist coalition. They quite like having something that sort of covers both of the centre-right and the centre-left. Maybe if we do see a very meaningful shift to the right, then some of the more right-wing blocs would have to be brought into this coalition. So the ECR for example, which has Giorgia Meloni’s Brothers of Italy party as a member. But we're not going to see the populist right grouping sort of enter into a coalition and sort of end up with a position in the European Commission. So I think it is something notable that's happening, as you said, particularly in countries like Germany and France. It's something that it's worth noting in terms of mapping out what may happen in their national elections in a couple of years’ time, however, really, we're likely to see a Commission after these elections that looks very similar to the Commission that we have now, as the parties that are part of this current coalition will still likely be the largest parties that form the next coalition as well. So we're not going to see a big shift in the true power base. We've also seen the European Parliament become very good at absorbing these sort of far-right populist movements as they come along, and sort of slowly integrating them or isolating them into the sort of the structure of the Commission and the structure of the Parliament. So I think it is probably overdone to say that it's going to be a sort of massive takeover of the European sort of structures and power bases. They will have influence if they do very well in these elections, you may see the debates around immigration and the green transition, have to take into account some of those more right-wing views. But it doesn't mean that there is going to be this enormous shift in the way that the Commission approaches anything because broadly speaking, the same leadership are going to be in charge after this election.
Luke Bartholomew
All right. Well, I think that is all we have time for this week. We will no doubt be revisiting many of these topics throughout the year as we get closer to the elections and get the results. But for now, please do allow me to remind you to like and subscribe wherever you choose to get your podcasts and then all that remains is for me to thank Lizzy for joining us today and to thank you all for listening. So thanks very much and speak again soon.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment, recommendation, or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provides no guarantee of future results.