What the Democrats' midterms win means for the US economy and Trump

For the millions who cast their ballots in the US midterm elections, one issue ranked above all others: the economy.

So what does the Democrats' stunning capture of both the US Senate and House of Representatives mean for the economy and economic policy, given that President Donald Trump still has two years of his term to run?

Initial market reaction has been muted but trending negative. Global stocks fell slightly, while the dollar followed suit.

With Democrats now holding comfortable majorities in both houses of Congress and Trump still in the White House, it could lead to gridlock in Washington. Trump has already said he would become "Mr Veto," meaning he would block any legislation the Democrats advance.

"The magnitude of the gains for the Democrats in the midterms does not change too much for the near-term policy outlook, given the party still lacks a filibuster-proof majority in the Senate and President Trump has veto power to block legislation," Stephen Brown, chief North America economist with Capital Economics, said in a note.

"I think we are looking at two years of complete 100% gridlock," Jacob Funk Kirkegaard, nonresident senior fellow with the Peterson Institute for International Economics, told DW after the results came in. "Nothing will get done of any kind."

However, some investors appear spooked that the Democrats could force through AI regulation, especially if they also win the White House in 2028. Rising opposition amongst large majorities of the US population to data centers — the key infrastructure behind AI — helped secure victories for many Democratic candidates.

Kirkegaard, who is also a senior fellow at Bruegel, a European economics think tank, says the vote showed the extent of that opposition. Even if the Democrats can't force regulation, he thinks local opposition will make it harder for data centers to be built, which could hit the valuation of big tech firms that have benefitted from the AI boom.

"This election shows that the political underpinning of the rapid, aggressive AI growth story is shaky," he says. "It doesn't mean it's going to stop or be made illegal, but the dynamic of the growth story has shifted."

Brown points out that if the Democrats were to win the presidency in 2028, they would be perfectly placed to make major policy changes. "That includes the potential for tax hikes on corporations and high-income individuals as well as regulation that could delay the AI rollout," he said.

According to polling conducted in early October by the Pew Research Center, 56% of Americans say Trump's tariff policies will have mostly negative impacts on the country, with only 20% saying mostly positive.

That sentiment clearly drove many Democrats to victory in the midterms, particularly in states where tariffs have had a particularly negative impact. That includes those with sectors reliant on exports, such as Texas, Michigan, Iowa and Illinois, where counter-tariffs have hit and those that have high trade volumes with Canada.

Yet barring an unprecedented climbdown from Trump — who has been ideologically wedded to tariffs since he first became a public figure almost 50 years ago — it's not clear how the Democrats can force substantial change to the president's signature economic policy.

"Trump will not be moderated," Deborah Elms, head of trade policy at the Hinrich Foundation in Singapore, told DW earlier this year. "Expect him to continue his trade disruption and tariff policies for as long as he remains in the Oval Office."

While the US Constitution gives Congress the power to collect and organize tariffs, various laws passed over the years have given presidents power to implement tariffs when they cite certain conditions, such as national security or economic emergencies.

Trump has already used such avenues for his tariffs and can continue to do so, despite some legal rebukes. However, while Congress can't necessarily force an end to Trump's existing tariffs, it can now take further legal action against them to prevent greater escalation.

Kirkegaard says that while Trump and the Democrats are clearly not going to make common cause, the scale of the Republicans' defeat might force Trump to be less erratic in his policymaking, from escalating his trade war with Canada to his Iran policy.

Trump said in the aftermath of Tuesday's defeats that he would "work with" the Democrats and told the Financial Times in the run-up to the vote that he was unlikely to escalate the war in Iran.

Were a deal to be struck with Iran, soaring energy prices — a pivotal election issue — could finally fall back, helping voters with their cost-of-living concerns.

"You've got to get a deal with Iran and you've got to bring down gas prices," says Kirkegaard. "From a political point of view, that's the most important thing now."

George Saravelos, an analyst with Deutsche Bank FX Research, thinks the markets are beginning to become more optimistic in that area. "With oil flows through the Middle East having materially recovered, the market is pricing a large imminent risk premium of re-escalation and energy supply disruption," he said in a note.

Despite the scale of the Democrats' victory across the board, the fact that Trump remains in the Oval Office will complicate all efforts to force a change to signature economic policies and issues.

Yet Congress can now exert considerable pressure. Another issue vital to voters was corruption and the belief that the Trump administration has engaged in corruption and personal enrichment while in office.

That raises the prospect of the new Democratic-controlled Congress launching legal investigations and potentially pursuing another impeachment of Trump, which could force the president to negotiate on some economic issues to secure his political survival.

"Can you find 10 or 12 Republican senators who, in the face of overwhelming corruption, would be willing to vote for articles of impeachment? I wouldn't rule it out," says Kirkegaard. "And that's a scenario in which Trump might suddenly be much more accommodating to, for instance, abandoning most of his tariffs."

Yet despite voters' clear rejection of Trump's economic policies, the Democratic Party's newly minted senators, congressmen and congresswomen face an uphill battle trying to reverse them.