OECD Warns of Slowing Growth as Tariff Pressures and Fiscal Risks Mount

The global economy held up better than expected in the first half of 2025, but signs of strain are now becoming more visible, according to the OECD’s latest Economic Outlook Interim Report. Industrial activity and trade were buoyed earlier this year by a surge in shipments ahead of new U.S. tariffs, while strong technology investment in the United States and fiscal support in China provided additional lift. Yet, as front-loading fades and trade barriers bite, the Paris-based organisation projects a slowdown in the coming quarters.

The OECD now forecasts world GDP to ease from 3.3% in 2024 to 3.2% this year and 2.9% in 2026. In the United States, growth is expected to fall to 1.8% in 2025 and 1.5% the year after, as the effective tariff rate on imports — already at its highest level since 1933 — feeds through into prices and demand. The euro area is projected to grow by 1.2% in 2025 and 1.0% in 2026, with easier credit conditions offsetting the drag from trade frictions and uncertainty. China is forecast at 4.9% this year, slowing to 4.4% in 2026 as fiscal stimulus wanes and property sector headwinds persist.

Inflation trends remain uneven. Headline inflation in the G20 is projected to fall from 3.4% in 2025 to 2.9% in 2026, helped by weaker growth and easing labour markets. But price pressures from food and services remain persistent, with U.S. inflation expected to stay above target through 2026 due to tariff pass-through. Meanwhile, disinflation has stalled in several economies, and food prices — notably rice in Japan and vegetable oils globally — continue to climb.

Labour markets are also beginning to soften. Job openings have declined in countries such as the U.S., Germany, and Canada, while unemployment rates have inched higher in parts of Europe, North America, and South Africa. Wage growth is moderating, though in some economies it remains above levels compatible with central bank inflation goals.

Financial markets have remained buoyant, with equity and crypto-asset valuations climbing. But the OECD cautions that asset prices appear stretched, raising the risk of a sharp repricing if growth falters or inflation surprises on the upside. Crypto-assets alone have swelled to nearly $4 trillion in market value, intensifying potential spillovers into the traditional financial system.

The report warns that the balance of risks remains tilted to the downside. Escalating tariffs, renewed inflationary shocks, or growing fiscal concerns could further weigh on activity. At the same time, stronger adoption of artificial intelligence and a pullback in trade restrictions could lift growth above baseline.

Policy recommendations centre on maintaining central bank vigilance while lowering interest rates where inflation is moving towards target, strengthening fiscal discipline to keep debt sustainable, and pressing ahead with structural reforms. The OECD highlights that boosting productivity through reforms and faster AI uptake could materially raise long-term growth and living standards across advanced and emerging economies.

Source: OECD