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US elections: why a small blue wave is good for Asia

Billed as the most important congressional elections for many years, with the potential to radically upset American politics, the US midterms turned out pretty much as the opinion polls predicted. This less exciting result is one that markets and companies in Asia should be able to live with rather well.

The Democrats were expected to make gains and duly won back control of the House of Representatives. However, their "blue wave" was no tsunami and the Republicans actually strengthened their hold on the Senate, while state governerships ended up almost evenly split between the two parties. So a rebuke to President Donald Trump for sure, but not a body blow.

Overall, the political balance has not altered enough to expect big policy changes that could undermine America's economic momentum. Democrats will not be able to roll back Trump's tax reform or undo the deregulation he has pushed through. The achievements of his first two years -- few in number but all broadly pro-growth -- are likely to be preserved. As such, US GDP growth is likely to continue to exceed its underlying trend of 2-2.5% for now. At some point, the economy will come down from this sugar high, but that may not be until the middle of 2019. Until then, it will continue to pull the world along in its wake -- which is good for Asian manufacturers and exporters.  

However, the return of Congressional gridlock means that the chances of a further fiscal stimulus have receded. Even new spending to repair the country's crumbling infrastructure -- the need for which Rs and Ds basically agree on -- seems unlikely given their deep partisan rivalry. That is negative for those same Asian exporters, of course, though in the short term it will likely lead to some dollar weakness, which they will welcome. 

More importantly,  the House Democrats will use their re-won majority to launch impeachment proceedings against the President as well as criminal investigations of his private businesses and his family. This will likely take up his entire attention for the remaining two years of his term and limit new policy initiatives from the White House. To be clear, I am not suggesting the US will soften its stance on international trade or unexpectedly lift sanctions on China and Iran. But with the focus on the domestic agenda, the likelihood of new radical and potentially destabilising measures overseas is now dramatically lower.  Once again, this is good news for specific Asian countries like China and broadly positive for everyone in the sense that US foreign policy should become less active and hence more predictable.

Of course, there are other, bigger issues to worry about, from the slowing of China's own economy to the build-up of leverage and financial imbalances in many parts of Asia and the world. But at least the US midterms produced neither a newly rampant Democratic party nor a victorious and vindicated President Trump. Tuesday's balanced outcome should lead to more political stability and in that sense we have all dodged a bullet.

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