Global Political Insights US Elections Outlook: It's Not Just The Economy, Stupid  Citi Research

Global Political Insights
US Elections Outlook: It's Not Just The Economy, Stupid
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We reiterate our view that President Barack Obama is likely to be re-elected November 6, with recent developments supporting our earlier call. Obama has led in the polls all year, and history suggests that incumbent presidents who maintain their lead go on to be re-elected. The US economy, although weak, has improved from its 2009 lows, potentially insulating Obama from the anti-incumbent “Ultravox Populi” effect evident in other mature democracies experiencing a decelerating economic trend. Nevertheless, the contest will be hard-fought.

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Ignore the pundits and partisans—think like a policy wonk. In this paper we provide a political science-based assessment of the polls with relevant historical comparisons; an early look at side-by-side policy positions, including the limited importance of foreign policy in this campaign; and signposts to watch for. We also deconstruct the mechanics of the complex US political system for an international audience. In the weeks ahead, we are doubtful that fundraising, advertising or the televised debates will significantly alter the main trend. Similarly, fluctuations in the weekly data will have little impact at this stage of the race.
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We note the reduced risk of an "October Surprise," as the two main external threats to the US economy—and thereby Obama’s re-election—have receded. Last week’s ECB measures reduce the potential for a disorderly eurozone event in the near-term. The likelihood of an attack on Iran ahead of US elections has declined in our view, following comments from the US political & defense establishment and other changes to the political calculus, pushing the risks into the new year.
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Prepare for a broad continuation of the political status quo. Our base-case scenario suggests Obama in the White House, Republicans in control of the US House, and Democrats in the US Senate. But although the current political configuration has delivered limited legislative momentum, we note that the history of last-minute deal-making could bode well for pragmatic compromise, if not the comprehensive fiscal reform markets crave. We retain our longstanding optimism on eventual progress toward tax reform and continued trade agreements, regardless of the occupant of the White House.
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Fiscal Cliffhanger? It may be the interests of both parties in Congress to go over the "fiscal cliff" temporarily, allowing legislators to vote on more favorable new legislation. It certainly looks like this possibility has not been priced into markets. At the same time, the history of last-minute compromise could continue into the '"lame duck" session between elections and the new year. But we expect no activity before the election, and subsequent cliff scenarios are highly dependent on the outcome at the ballot box and the actors leading the negotiations.