Bank of America has raised concerns about fiscal trajectories in Germany and the United Kingdom as markets, following a correction in energy prices, refocus on broader economic and budgetary issues.
In Germany, the bank notes that the country is reverting to standard budget planning for the first time since 2023. That procedural return does not eliminate fiscal pressure: the 2027 budget already faces headwinds. Defence spending is being increased and conventional economic cycles are exerting additional strain on public finances. Bank of America also observes a shift in monetary policy discussion - with the peak of monetary easing having occurred in 2026 and debate moving toward the possibility of policy tightening.
Turning to the United Kingdom, Bank of America flags political risk as a channel to fiscal instability. The firm warns that the outcome of May’s local elections may elevate the chance of a leadership challenge. Should such a challenge occur and produce a left-leaning Labour leader, Bank of America regards the risk of higher government borrowing as greater. In that scenario, a negative market reaction would reduce the certainty that fiscal rules could be relaxed without cost.
The note also covers central bank developments in the Nordic region. Bank of America describes the Riksbank as effectively on hold but with upside risks to policy rates. A move toward a 2.0% policy rate in forthcoming meetings remains likely in the bank’s view, although risks are skewed toward a possible delay. Norges Bank surprised markets with a May rate increase, and that action raises the possibility of a back-to-back hike in June if inflation outturns come in stronger than expected.
Key macro releases this week add to the watchlist. The second estimate of euro-area Q1 GDP is due Wednesday, where consensus expectations point to 0.1% quarter-on-quarter growth. The UK’s Q1 GDP print is scheduled for Thursday with a forecast of 0.5% quarter-on-quarter growth. Germany’s ZEW economic sentiment indicator for May is expected to show a decline, with results set for Tuesday.
Taken together, Bank of America’s commentary frames a market environment in which lower energy prices have shifted focus onto fiscal balances, political developments, and central bank sequencing. Investors and policymakers will be watching the upcoming data flow and central bank decisions for confirmation of the trends highlighted by the bank.