Mid-term elections point to gridlock

As widely expected, the Republicans regained control of the House of Reprentatives in yesterday's midterm elections but failed to overturn the Democratic majority in the Senate. The division of power all but guarantees fiscal gridlock until after the Presidential election in 2012. With the Federal budget deficit at 9% of GDP, however, there was little prospect of any further large-scale fiscal stimulus anyway. (See Chart 1.) More generally, the risk of a lurch towards protectionism is growing.