OECD cuts global growth outlook amid trade & policy strains

Global economic prospects are weakening as substantial barriers to trade, tighter financial conditions, declining confidence, and growing policy uncertainty are set to weigh heavily on growth, according to the OECD’s (Organisation for Economic Co-operation and Development) latest Economic Outlook.

The organisation forecasts global GDP growth to slow from 3.3 per cent in 2024 to 2.9 per cent in both 2025 and 2026. This deceleration will be most pronounced in the United States, Canada, Mexico, and China, while other economies will see smaller downward adjustments.

“The global economy has shifted from a period of resilient growth and declining inflation to a more uncertain path. Our latest economic outlook shows that today’s policy uncertainty is weakening trade and investment, diminishing consumer and business confidence and curbing growth prospects,” OECD secretary-general Mathias Cormann, said in a release.

In the United States, growth is projected to fall sharply from 2.8 per cent in 2024 to 1.6 per cent in 2025 and 1.5 per cent in 2026. China's economy is expected to lose momentum, with growth slowing from 5.0 per cent in 2024 to 4.7 per cent in 2025 and 4.3 per cent in 2026. The euro area is forecast to experience a modest recovery, with GDP growth rising from 0.8 per cent in 2024 to 1.0 per cent in 2025 and 1.2 per cent in 2026.

Inflationary pressures have re-emerged in some countries, especially those introducing higher trade tariffs. These elevated trade costs are likely to feed inflation further, although the impact may be softened by declining commodity prices. Overall, annual headline inflation in G20 economies is expected to ease from 6.2 per cent in 2024 to 3.6 per cent in 2025 and 3.2 per cent in 2026.

The Outlook outlines several downside risks. Chief among them is the danger of worsening trade fragmentation, which could trigger new rounds of tariff hikes and retaliatory actions, intensifying the slowdown and disrupting global supply chains. Inflation could also prove more persistent than expected, especially in economies grappling with tight labour markets and rising costs, potentially leading to stricter monetary policies and further pressure on growth.

Rising debt service costs pose an additional challenge, straining public finances across the globe. Tighter financial conditions particularly threaten low-income countries, while equity markets remain volatile despite recent recoveries.

However, the OECD notes some upside scenarios. Removing new trade barriers could improve growth and reduce inflationary pressures. A peaceful resolution to Russia’s war in Ukraine and the conflicts in the Middle East would also bolster investment confidence.

The report advises central banks to remain cautious. Given the uncertainty and potential for tariff-driven inflation, they should only proceed with policy rate reductions where inflation is easing, and demand remains subdued. To preserve fiscal resilience, governments must focus on long-term debt sustainability. This includes curbing and reallocating expenditures, enhancing revenue generation, and adhering to credible medium-term fiscal strategies.

The OECD concludes that subdued growth prospects, geopolitical instability, and trade tensions underscore the urgency of structural reforms. To sustain living standards and global competitiveness, policymakers must prioritise efforts to boost investment, productivity, and innovation.

“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,” Cormann added.

“Investment has been in decline since the global financial crisis and that has been holding back growth. 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,” OECD chief economist Álvaro Santos Pereira suggested.

ALCHEMPro News Desk (HU)