After the US midterms, what will a lame duck Trump mean for the global economy? | US midterm elections 2026
Donald Trump’s loss of control of the House of Representatives and the Senate has put the world economy on notice for an unpredictable final two years of his presidential term.
After Democrats swept aside his Republican party in the midterm elections, analysts said the prospect of a highly erratic lame-duck president would have significant implications for financial markets, growth, inflation, government borrowing costs and living standards.
Here are the biggest expected consequences for the US economy and for other countries.
Stock markets
Markets initially dropped in early trading in Asia overnight but rallied as investors weighed up the midterm results.
Investors typically dislike uncertainty and political chaos. The fact that the president conceded the result and acknowledged the impact of the Iran war has been taken as a positive in markets. However, his warning that he will become “Mr Veto” raises the prospect of a turbulent finale to his time in the White House.
Holger Schmieding, the chief economist at Berenberg, said 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.”
Much of the outlook for stock markets, inflation and growth is contingent on the war in the Middle East and the pace of the advance of artificial intelligence.
Traders expect the Democrats to take a tougher line on AI regulation and the datacentre rollout, raising questions over a driver of stock market growth. There are also concerns that Trump, with the midterms out of the way and his control over domestic policy weakened, could take a more aggressive approach to foreign policy, with the potential to intensify the war in Iran.
Inflation
The cost to US households from surging inflation triggered by a deeply unpopular war, alongside a chaotic tariff policy that has devastated small businesses, was key to the midterm result. US diesel prices surged to a record high in August, while the headline inflation rate has risen to 3.7%.
The US-Israeli invasion of Iran, leading to the closure of the critical strait of Hormuz, reignited global inflationary pressures amid the biggest energy price shock of the modern age.
The oil price fell back on Wednesday, dropping by as much as 9% to trade below $100 a barrel for the first time in a month, as investors digested the midterm results amid hopes of a diplomatic breakthrough on Iran. Trading at about $94, Brent crude, the international benchmark, remains significantly higher than its prewar level of about $70. As a consequence, the International Monetary Fund (IMF) expects global headline inflation to rise to 4.7% this year, with energy-importing countries hardest hit.
The possibility of Trump ramping up hostilities against Iran would add to the inflationary shock, but it would also further add to his unpopularity.
Interest rates
Higher inflation has forced central banks to raise interest rates, with the US Federal Reserve defying pressure from Trump by increasing the cost of borrowing for the first time since 2023.
Against a volatile backdrop in the war and as inflationary pressures persist, investors anticipate at least one more rate increase from the Fed. The Bank of England is expected on Thursday to raise rates, while the European Central Bank is also expected to push up borrowing costs.
After losing control of Congress, the Republicans will lack the votes to confirm new appointments to critical public bodies, including new Fed governors. Trump could still use his veto powers, which can be overturned only if two-thirds of both chambers agree.
Government finances
Higher inflation and interest rates triggered by the Iran war have driven up borrowing costs, adding to the pressure on countries with high levels of public debt.
In the US, the logjammed political system will face its first major test on 11 December, when politicians have to agree to authorise government spending to avoid a shutdown. The gridlock could prevent Trump from launching new tax and spending measures, which could cut two ways, restricting the capacity for fiscal stimulus to boost the economy, but also limiting a further rise in borrowing and debt.
Analysts say the crushing midterm defeats for Maga candidates will hurt the president’s authority and could pave the way for more cooperation between Republicans and Democrats in Congress.
Economic growth
Analysts say political turbulence and presidential actions on trade and immigration could put US growth at risk, but inflation and, most importantly, the prospects for de-escalation in the Middle East are the main factors to watch.
Investors are wary that a clampdown by the Democrats on AI could hit investment and growth in the US. The spillovers from the tech boom have been felt around the globe, with AI investment helping to bolster the UK economy.
However, tech industry leaders were already cooling on the rollout of AI amid concerns over cyber risks. Many investors also feared the emergence of a bubble in the US stock market. Analysts at Allianz say the scale of AI investment, and its capacity to power global economic growth, could mean the left-right political playbook is less predictable than in the past. Environmental and social impacts are also increasingly important considerations.
As recently as last month the IMF forecast that US growth would remain stable at 2.3% this year and next, despite the heightened risks to activity caused by the Iran war and the uncertain path for AI investment.
Analysts at Berenberg said US growth could slow to about 1.5% in 2028 amid political gridlock, a slowdown over AI and a drag from Trump’s crackdown on immigration. As a result, the US would contribute less to global growth than before, they said.
