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Investing.com -- Bank of America warned that U.S. policy shifts risk fueling stagflation, even as global growth holds steady.
In a note to clients, BofA wrote: “We remain constructive on US growth, but higher tariffs and immigration restrictions are a recipe for mild stagflation.”
The bank forecasts U.S. growth at 1.7% in 2025–26, with the economy rebounding in the second half of this year.
However, it now expects “core PCE inflation peaking at 3.3% this year and stuck above 3% in 1H26.”
The note cautioned that “Powell’s dovish pivot at Jackson Hole has significantly increased risks to our Fed-on-hold call.”
With the labour market slowing due to supply-side constraints, BofA argued that “rushing to cut rates could translate into a policy error.”
Globally, BofA projected growth of 3.1% in 2025, supported by frontloaded exports to the U.S. ahead of tariff hikes. Growth is seen moderating to 3% in 2026 before edging up to 3.2% in 2027.
Inflation, however, is likely to remain uneven, with BofA noting that “uncertainty is likely to remain elevated relative to normal times, with trade-related uncertainty giving way to other concerns including the Fed.”
In Europe, the bank expects the euro area to “barely grow this year but hopefully accelerate next year thanks to improving external demand and the German fiscal impulse.”
Still, BofA warned of a “persistent inflation undershoot,” forecasting the European Central Bank will deliver 50 basis points of cuts by March 2026.
Meanwhile, China’s economy expanded 5.3% in the first half of 2025, but BofA flagged “a persistent weakness in domestic demand in both investment and consumption,” with growth seen slowing to 4.1% by 2027.