Four more years for Obama: The hard path to economic recovery

The election which was four years in the making was decided today, with President Barack Obama re-elected for four more years. Ohio and Florida still sit on a knife-edge, but even without those two states Obama will still carry the Electoral College with wins in Virginia and Colorado. The cloud to his silver lining, however, is that he’s only just in front on the popular vote – by less than 150,000 votes. 

The narrow margin of victory doesn’t come as a surprise. This election has been incredibly close all the way through. The polls predicted a narrow race, with Obama holding a slight but significant lead in important battleground states. Although Republicans claimed that Romney had momentum, as November 6 approached it was Democrats who had reason to hope in the wake of Hurricane Sandy after positive economic news in October and November.

With networks hoping to announce a winner before 4pm (AEST), attention will turn to what Romney or Obama will do in victory and how that will affect economies around the world.

The immediate effects on the market were as unpredictable as the outcome, experts told LeadingCompany in the lead-up to Obama’s victory.

Shane Oliver, chief economist at AMP Capital Investors, says the stockmarket could’ve made big gains in the aftermath of a Romney victory, primarily because an Obama win was expected. That reaction could have been muted, though, if the house is divided, with Democrats holding the Senate and Republicans the House.

Obama’s honeymoon will be shortlived. Before the dust settles, questions will be asked about how he will deal with the federal debt and the fiscal cliff: the group of policies, including tax increases and massive government spending cuts, which will come into effect on December 31 if the Democrats and Republicans don’t agree on another way to reduce the federal debt.

CommSec chief economist Craig James says the resolution of the fiscal cliff is the most important problem facing the US president.

“The US economy is recovering. If that recovery was to falter there’s not too many countries around the world that could pick up the cudgel. China is also recovering and Europe will remain weak for some time so what we need is a strong USA.”

Oliver agrees: “If they go off the fiscal cliff with no hope of resolving it, that would be sufficient to plunge the US economy into recession.”

However, there are big limits on Obama’s ability to fix the problem.

“From day one the focus will be on the fiscal cliff and there’s nothing the victor can do on their own,” Oliver says.

There is a key reason for this. Firstly, Obama is likely to face a divided congress. 

In the longer term, the economy will remain a key issue. Unemployment is high and GDP is growing at only 2%. Much has been made in the US press over whose policies will be better for the economy. Some papers’ endorsement decisions have been decided solely on this fact.

Prior to the decision being annouced, James said that no matter who won, their policies would have to be diluted. “[The winner] won’t have any impact whatsoever. Whether it’s Obama or Romney it’s likely we’ll have a divided congress and that means whoever’s in charge will still have to do some horse trading to get their policies through.”