Citing the disruptive impacts of shifting U.S. trade policy, the Organization for Economic Cooperation and Development (OECD) is cutting its economic forecasts.
The OECD now expects global growth to slow to 2.9% in 2025 and 2026 from 3.3% last year.
“The slowdown is expected to be most concentrated in the U.S., Canada, Mexico and China, with smaller downward adjustments in other economies,” it said.
It now projects that U.S. GDP growth will drop to 1.6% this year and to 1.5% in 2026, down from 2.8% in 2024.
For Canada, growth is now seen slowing to 1% this year and 1.1% in 2026. Mexico is expected to grow at just 0.4% before rising to 1.1% next year. China’s growth is projected to ease from 5% in 2024 to 4.7% this year and to 4.3% in 2026.
Elsewhere, growth in the euro area is projected to strengthen slightly from 0.8% last year to 1% this year and 1.2% in 2026.
At the same time, inflationary pressures have resurfaced, the OECD said.
“Higher trade costs in countries raising tariffs are expected to push inflation up further, although the impact will be partially offset by weaker commodity prices,” it noted.
“The global economy has shifted from a period of resilient growth and declining inflation to a more uncertain path,” said Mathias Cormann, secretary general at the OECD, in a release accompanying the new forecast.
“Our latest economic outlook shows that today’s policy uncertainty is weakening trade and investment, diminishing consumer and business confidence and curbing growth prospects,” he added. “Governments need to engage with each other to address any issues in the global trading system positively and constructively through dialogue — keeping markets open and preserving the economic benefits of rules-based global trade for competition, innovation, productivity, efficiency and ultimately growth.”
Against this backdrop, the OECD’s outlook also highlights a range of risks, including the threat of further trade conflict that could intensify the slowdown and significantly disrupt cross-border supply chains.
Additionally, it warned that inflation could prove more persistent than expected, particularly in economies “facing substantially higher trade costs or with tight labour markets,” prompting more restrictive monetary policy and weakening growth prospects.
Governments could also face increased fiscal pressure, and equity markets remain volatile, it noted.
Upside risks include the possibility that recent trade barriers are scrapped, which would boost global growth prospects and reduce inflation, and the resolution of conflicts in Ukraine and the Middle East, which could also improve confidence and investment.
“Central banks should remain vigilant, given heightened uncertainty and the potential for initial increases in trade costs to push up wage and price pressures more generally,” the OECD said.
“Provided inflation expectations remain well anchored, and trade tensions do not intensify further, policy rate reductions should continue in economies in which inflation is projected to moderate and aggregate demand growth is subdued,” it said.
Investment needed
On the policy side, the OECD called for “ambitious structural policy reforms that strengthen living standards and promote economic competitiveness,” with a focus on policies to reinvigorate investment and promote innovation and improved productivity.
“Investment has been in decline since the global financial crisis and that has been holding back growth,” said Álvaro Santos Pereira, chief economist at the OECD.
“Greater investment in the digital and knowledge-based economy is a positive development, but public investment remains stagnant and housing investment is failing to keep up with demand. A bold policy reform agenda to boost investment can build a stronger global economy for the 21st century,” he said.