Fiscal clouds gather over the West as U.S. growth remains resilient: BofA

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Bank of America’s internal data suggests U.S. job growth continued to decelerate in September, though wages rose across income levels, particularly among higher earners. Economists Claudio Irigoyen and Antonio Gabriel said in an October 10 report that the combination of higher wages and solid consumer spending reinforces their view that U.S. growth remains resilient despite labor market cooling.

The data indicate that while high-income households are faring better, spending is also increasing across lower- and middle-income groups, helping sustain aggregate consumption.

“Much of the labor market rebalancing is supply-driven amid tighter immigration rather than a sign of overall weakness,” the economists wrote, adding that overly aggressive Federal Reserve easing could risk overstimulating demand.

FRANCE’S FISCAL GRIDLOCK DEEPENS

In Europe, Bank of America economists warn that France’s ongoing political crisis, rooted in President Emmanuel Macron’s struggle to pass a budget, makes deficit reduction below 5% of GDP “unrealistic.” Macron is expected to name a new prime minister soon to avert a fresh round of elections, but BofA’s team sees little confidence in any outcome that could deliver long-term fiscal stability.

Even under a centrist coalition, Irigoyen and Gabriel project a 2026 deficit near 5%, with limited downside or upside unless a major shock occurs.

“The risk of new elections and an even more volatile near-term path has somewhat reduced but remains high,” they said.

U.K. FACES SHRINKING FISCAL HEADROOM

The U.K. government’s upcoming Autumn Budget on November 26 is likely to reveal a £20 billion to £30 billion reduction in fiscal headroom, BofA projects. The analysts expect Chancellor Jeremy Hunt to offset the shortfall through multiple small, non-inflationary tax rises, avoiding deeper spending cuts that could provoke a political backlash.

They caution, however, that breaking fiscal rules could trigger adverse gilt market reactions, making a balanced but constrained approach the most likely outcome. A frontloaded fiscal adjustment could slightly weigh on 2026 growth and influence the Bank of England’s rate path.

JAPAN TURNS DOVISH AFTER ELECTION

Japan’s new prime minister, Sanae Takaichi, has brought what BofA calls new airs of fiscal and monetary dovishness. Her victory over expected frontrunner Koizumi led to a swift 4% depreciation in the yen. Takaichi is an advocate of expansionary fiscal policy and may pursue larger stimulus than her predecessors, though the scale remains uncertain.

Despite her stance, Bank of America expects the Bank of Japan to maintain its gradual tightening path, with the next rate hike anticipated in January 2026 and subsequent moves roughly every six months.

AI INVESTMENT POWERING U.S. GROWTH

In a separate analysis, BofA economists said the AI boom remains a major driver of U.S. investment. AI-related categories such as software, computer equipment and data centers contributed roughly 1.5 percentage points to quarterly GDP growth in the first half of 2025.

While tariff frontloading complicates the picture, analysts believe AI-driven capital expenditure will remain a structural tailwind. Hyperscaler firms such as Microsoft (MSFT [https://seekingalpha.com/symbol/MSFT]), Amazon (AMZN [https://seekingalpha.com/symbol/AMZN]), Google (GOOG [https://seekingalpha.com/symbol/GOOG]) (GOOGL [https://seekingalpha.com/symbol/GOOGL]) and Meta (META [https://seekingalpha.com/symbol/META]) are expected to increase capex by 18% next year, contributing an estimated 0.3 percentage points to GDP growth.

Despite concerns that AI could displace workers, BofA finds little evidence of widespread job losses so far. In fact, employment growth remains stronger in white-collar industries with higher AI adoption. AI is more capex driver than job destroyer, at least for now, the economists wrote.

OUTLOOK: FISCAL STRAIN MEETS TECHNOLOGICAL RESILIENCE

Bank of America’s “Global Letter” highlights a widening divergence between fiscal fragility across major developed economies and structural strength in private-sector investment. While France, the U.K. and Japan grapple with fiscal constraints, the U.S. economy continues to defy slowdown expectations, thanks in large part to wage momentum, consumer resilience and the accelerating adoption of artificial intelligence.

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