Thursday 6th November 2008
by Bob Bardsley
Know Your Money Editor
The week's headlines have been dominated by Barack Obama's election as the next president of the US. But what is the US election likely to mean for the economy - both across the pond and here in the UK? With economists already noting "the Obama effect", could this finally be the decisive turning point in the global credit crunch? Or has the international financial climate already reached a point where the Democratic senator's hands are tied due to a lack of funds?
Dancing in the streets
Whatever happens in the coming months, it seems the initial response to the election results was positive in at least some parts of the US. Joshua Raymond, market strategist at trading platform provider City Index, reports people "dancing in the streets" during the evening of the announcement, part of what he terms "the Obama effect" - a general and immediate increase in optimism among many citizens. He points out, however, that this optimism was not limited to US residents alone, but was reflected in trading on the stock markets too.
"The Obama effect has firmly gripped the markets this week and we expect this to continue," he comments. However, he warns against seeing the short-term trend as an indication that the financial turbulence seen in previous weeks is over. Instead, he recommends considering the current time to be the honeymoon period following the election result. Once the short-term increase in optimism and willingness to buy passes, Mr Raymond suggests that it may be easier to determine whether the market recoveries will last.
He also stresses that any increase in consumer sentiment is likely to be reflected in the markets with a spate of purchases from investors. "When we are positive, we are more inclined to buy," he contends, "and there is lots of positivity out there right now."
What will Obama do?
It may seem reasonable to expect that Obama will begin his tenure as president with attempts to establish a more secure financial footing than has been apparent towards the end of George W Bush's administration. But how may this be achieved? A number of economists warn that any attempts to strengthen the US economy may require significant expenditure - but that money is already tight, leaving the incoming president with the quandary of where to raise funds from.
Asset management firm Threadneedle claims that investment in infrastructure could help to stimulate the economy if accompanied by interest rate cuts. As a result, the organisation speculates that Obama may choose to put funds directly into the housing market, or direct investment into employment in light of the anticipation that one in ten US residents are to be unemployed in the coming months as the nation's recession bites. But the firm intimates tax increases as a likely means for funds to be raised in order to meet the costs of any such investment.
Ben Larter of JPMorgan Asset Management also points out that the elections have resulted in a Democratic president with a Democratic majority in the House of Representatives. As such, he notes that Obama is likely to have the House on his side when making any decisions - such as raising taxes. With the support of the House needed in order to push through any such legislation, Mr Larter anticipates swift and aggressive action by the representatives in pursuit of the Democratic agenda.
What about the UK?
So just what does the election result mean for the UK? The Guardian reports Conservative leader David Cameron's assertion in parliament that many people in the US may have voted for a Democratic president purely as Obama represents a change from the Republican administration they have had in recent years. With Labour having been in power in the UK for more than a decade, Mr Cameron asked whether British voters are likely to continue to cast their ballot in the direction of a government which offers "more of the same".
The BBC, meanwhile, warns that attempts to maintain relationships with the US within industry could become strained due to "protectionist" employment policies across the Atlantic. The broadcaster notes the impending Patriot Employer Act - introduced last year by Obama - which promises tax breaks to companies in the US which employ high levels of full-time domestic workers. But the article adds that this could result in terse dealings on international trade with the UK if Britons' employment levels in the US begin to suffer. With the Act yet to become law and the predicted increases in taxes made by economists, it could yet remain to be seen whether Obama's attempts to bolster his own economy could ultimately damage the UK's standing.
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