Affinity Policy Comment 7 October 2024

Close Quarters Fight

US election day on 5 November is fast approaching, and the presidential race remains highly competitive. Following the first presidential debate, Harris gained a slight edge in many swing states, but recent polling data shows the candidates are essentially tied.

Trump has expanded his advantage in Arizona, Georgia and North Carolina. Harris remains in the lead in Michigan despite the worsening situation in Middle East, even if the US stance on the war in Gaza was a key issue in the local Democratic primaries. In Pennsylvania, the race remains very close, with the two candidates tied. In the 2020 election, Trump only won North Carolina, while Biden secured the rest of these key battleground states.

Polls suggest that voters generally perceive Trump as better suited to handle issues like the economy and immigration. Conversely, voters have more faith in Harris when it comes to issues such as preserving democracy and abortion. In most swing states, the economy remains the number one issue. For instance, 30 per cent of voters in Arizona and 49 per cent in North Carolina see this as their top concern and feel their economic situation has deteriorated over the past few years, reinforcing Trump's position in these historically Republican-leaning states. On the other hand, abortion is also considered one of the most prominent issues in swing states, indicating that the battlegrounds are far from settled.

While 2020 Trump voters have largely remained loyal to Trump, Biden's 2020 voters are less convinced of Harris. According to data from AtlasIntel,  89 per cent of Biden's 2020 voters are expected to support Harris in Pennsylvania, compared to 98.3 per cent for Trump's 2020 voters. Perhaps surprisingly, her support, especially among female voters, appears to fall short of Biden's in 2020, even if generally Harris has outperformed Biden's final 2024 polling results from June-July among females.

Another reason likely attributed to the uncertainty among former Biden voters could be the Democrats' declining support among young men. Reportedly, many of them feel disconnected with the party due to its stance on issues like worsening educational outcomes, economic challenges and mental health.

That said, Harris remains popular with Gen Z, leading Trump by 30 points among young women and 4 points among young men, according to an NBC poll. Harris also remains most popular among black, non-Hispanic voters in most of the swing states, with 92 per cent of these voters supporting Biden in 2020. Black Americans are projected to account for 14 per cent of eligible voters this year per Pew Research Center.

Finally, we had the vice-presidential debate between Republican JD Vance and Democrat Tim Walz. Vance focused on Biden-Harris immigration failures, while Walz emphasised middle-class support. In general, the debate remained cordial, with watchers seeing both VP candidates more favourably after the debate, according to CBS. The polite tone of the discussion and the lack of name-calling could have benefitted Vance, whom Democrats have previously tried to label as “weird”. That said, watchers saw the debate essentially as a draw, with 42 per cent favouring Vance, 41 per cent favouring Walz, and 17 per cent called it a tie.

In other news, two weeks ago, Chinese policymakers drew a line in the sand and surprised with the most sizeable stimulus measures since the Global Financial Crisis in 2008/2009. The growth signal was underlined by the monthly meeting in the Politburo on Thursday, which focused solely on the economy. The agenda was a break with the usual schedule as the economic situation is normally only the agenda of Politburo meetings in April, July and October. The readout from the meeting also left no doubt that growth has moved to the top of the agenda, with leaders saying that the decline in the housing market should stop and the counter-cyclical stimulus will be intensified. They also sent a clear signal to local policymakers to experiment to lift the economy, specifically saying that errors would not be punished. This was an all-clear from China’s government to go for growth.

The extent of the stimulus took markets by surprise as witnessed by the strongest equity rally since 2008. China has launched many stimulus packages before, but they have tended to be smaller and the expectation was they would again do only what was necessary to keep the economy afloat, but nothing more than that. One may therefore ask, why now? Why did policymakers decide that it was time to pull out the big stimulus? And why not before?

The first reason is Chinese leaders believed that the first part of the crisis has been necessary. China’s housing bubble needed to be deflated and the pain it caused was an unfortunate but unavoidable side-effect. China is in a transition to a new growth model, as illustrated by the quote in the margin by China’s central bank governor Pan Gonsheng from December 2023, when he highlighted that China is on a long and difficult journey to transition to a new growth model. Pulling out the big guns too early could have stopped the necessary adjustment and pushed the problems down the road.

However, the deflating of the bubble has come far now, and without decisive action, China could enter a second phase of the crisis where the country slides into “a lost decade” because confidence fails to recover once the necessary adjustment of the housing market has been achieved. Avoiding this scenario requires much larger-scale stimulus.

A second reason why leaders took action now is probably that the pain keeps growing among Chinese people. Consumer confidence and expectations of future employment have continued to slide this year to even more extreme lows. Retail sales growth has also fallen back to just 2 per cent growth from around 7-8 per cent at the beginning of 2024 and inflation is again flirting with deflation levels as core inflation has fallen to 0.3 per cent y-o-y. Finally, youth unemployment continues to rise and reached 18.8 per cent in August, a new high after they changed the methodology in late 2023. If this pain goes on for much longer, it may at some point trigger rising protests and social instability.

In the past three years or so, China has served as a global disinflationary factory through both weaker commodity demand as well as falling export prices related to domestic overcapacity. Looking ahead, China might gradually become less of a disinflationary factor and more a neutral force for global inflation. As housing stabilises and slowly recovers, commodity demand should increase and a lift to domestic household demand should also work to reduce overcapacity. However, rather than a rapid rebound, there should be a gradual bottoming and, despite a rise in demand, it will take time to reduce overcapacity.


Affinity Research LLP