The global economy faces heightened risks in the coming years, according to the Organization for Economic Cooperation and Development (OECD). In its latest Steering through Uncertainty report, the OECD has downgraded its global GDP growth projections by 0.2% since its previous update, citing a slowdown driven largely by trade tensions, particularly the tariff policies of former U.S. President Donald Trump.
The revised forecast suggests global GDP growth will soften from 3.2% in 2024 to 3.0% by 2026. The OECD attributes this dip to rising trade barriers and the resulting economic uncertainty, which is expected to impact both investment and consumer spending across the world. The organization also projects a steady decline in inflation across the G20 economies—from 3.8% in 2024 to 3.2% in 2026—though core inflation will remain stubbornly above central bank targets in many nations, complicating efforts to stabilize prices.
One of the main factors influencing these projections is the anticipated rise in bilateral tariffs, especially between the United States, Canada, and Mexico, which are set to increase by 25% starting April 2025. This escalation of trade barriers is expected to have a profound impact on global economic performance, adding to inflationary pressures and possibly leading to restrictive monetary policies that could further disrupt financial markets.
Key Regional Adjustments
The OECD’s updated forecast also highlights significant revisions for major economies:
- United States: The U.S. is expected to see its annual real GDP growth slow from 2.2% in 2024 to just 1.6% by 2026, largely as a result of the ongoing trade conflict and rising tariffs.
- Euro Area: Growth in the Eurozone will remain subdued, with projections of just 1% in 2025 and 1.2% in 2026, as uncertainty stemming from political and economic shifts dampens investment.
- China: China’s growth will decelerate from 4.8% in 2024 to 4.4% by 2026, reflecting the broader global economic slowdown.
- United Kingdom: The UK’s growth forecast has been revised downward to 1.4% in 2024, lower than previously expected, with further modest growth of just 1.3% in 2025.
- Australia: Australia faces a 0.7% cut in its GDP growth forecast for next year, now projected at just 1.8%.
The Global Impact of Trade Fragmentation
The OECD report warns that the fragmentation of global trade is one of the primary risks to future growth. The rise of trade barriers not only hinders the flow of goods and services but also contributes to inflationary pressures. If inflation exceeds expectations, central banks may be forced to implement stricter monetary policies, exacerbating economic slowdowns.
However, the report also offers a glimmer of hope. A more stable and cooperative policy environment could reduce uncertainty and encourage international agreements aimed at lowering tariffs. Such actions, along with structural reforms and fiscal measures, could help stimulate growth and counterbalance the adverse effects of current trade disputes.
The Path Forward
For the global economy to recover and grow sustainably, the OECD stresses the importance of international cooperation. Key recommendations include:
- Monetary Policy: Nations with subdued inflation should consider lowering interest rates further to support economic activity.
- Fiscal Efforts: Governments should continue to refine fiscal policies to manage public spending and bolster resilience against future economic shocks.
- Structural Reforms: Domestic reforms to improve productivity and address trade pressures are crucial for long-term stability.
While the outlook is currently bleak, the OECD suggests that addressing trade barriers and pursuing more coordinated policy actions could potentially lead to stronger growth in the near term. The organization’s report highlights that international collaboration remains essential to mitigating the economic risks posed by rising protectionism and ongoing geopolitical tensions.
In conclusion, the OECD’s revised growth projections paint a cautious picture for the global economy. With trade disputes and inflationary pressures dominating the landscape, achieving sustainable growth will require a concerted effort from governments and policymakers worldwide. The path forward will depend on reducing trade barriers, stabilizing inflation, and implementing fiscal and structural reforms to safeguard future prosperity.
Sources: OECD Steering through Uncertainty Report
