Analysts warn of economic uncertainty as Trump enters final two years of term after midterm losses

The United States' shift to a Democratic majority in the House and Senate has raised concerns about the stability of the global economy during the remaining two years of President Donald Trump’s term. Analysts say the new political balance could affect stock markets, inflation, borrowing costs and overall growth, with the ongoing war in the Middle East and the pace of artificial-intelligence development acting as key variables.

"The result showed that US voters had rejected Trump and his somewhat authoritarian penchant for crony capitalism. That shows that US institutions and its checks and balances work. That is a positive, in my view," said Holger Schmieding, chief economist at Berenberg.

Equity markets reacted with an initial dip in Asian trading before recovering, as investors weighed the uncertainty of a lame-duck presidency against President Trump’s concession of the election outcome and his acknowledgement of the Iran war’s impact. However, his statement that he will become “Mr Veto” has kept some investors cautious about potential policy turbulence.

Inflation pressures have risen, with headline rates at 3.7% and diesel prices hitting record levels, driven in part by the US-Israeli invasion of Iran and the closure of the Strait of Hormuz. Although Brent crude has fallen from its peak above $100 a barrel, it remains well above pre-war levels, prompting the International Monetary Fund to project global headline inflation at 4.7% for the year.

The Federal Reserve has raised interest rates for the first time since 2023, defying pressure from the White House, and further hikes are expected amid persistent inflation. Similar moves are anticipated from the Bank of England and the European Central Bank. With Republicans lacking a congressional majority, they will be unable to confirm new appointments to bodies such as the Federal Reserve, limiting President Trump’s influence over monetary policy despite his veto power.

Fiscal policy faces a test on 11 December, when Congress must approve government spending to avoid a shutdown. The political gridlock could restrict new tax or spending initiatives, curbing both potential stimulus and additional borrowing.

Growth forecasts remain mixed. The IMF expects US GDP to stay around 2.3% this year and next, while Berenberg projects a slowdown to about 1.5% by 2028, citing political stalemate, tighter immigration rules and possible constraints on AI investment. Analysts note that Democratic moves to regulate AI and data-centre expansion could dampen a major driver of recent market gains, while concerns about a tech-bubble and cyber-risk persist.

Overall, the combination of geopolitical tension, domestic political shifts and regulatory uncertainty is set to shape the United States’ economic trajectory and its contribution to global growth.