The global economic outlook has taken another downturn, with the OECD revising its 2025 growth forecast down to 2.9%, following a series of negative adjustments for major economies. This latest cut underscores the persistent headwinds facing the world economy, primarily driven by heightened trade barriers, tighter financial conditions and ongoing geopolitical uncertainty.
The US, which had shown resilience in previous years, is now projected to experience a significant slowdown, with GDP growth expected to decelerate from 2.8% in 2024 to 1.6% in 2025 and 1.5% in 2026. The report marks a downward adjustment to earlier expectations — even after a previous OECD downgrade earlier this year — and highlights the growing impact of policy uncertainty, particularly the ongoing tariff escalations and the broader consequences of protectionist trade policies.
Slower global growth: Key factors at play
The global economy is facing several challenges that are curbing growth. The OECD — the Organisation for Economic Cooperation and Development, an intergovernmental organisation formed to stimulate trade and economic progress — now expects global GDP to grow at 2.9% in both 2025 and 2026, down from its earlier forecast of 3.1% for 2025 and 3% for 2026.
The broad slowdown is especially concentrated in the US, Canada, Mexico and China. China's growth, for instance, is expected to moderate from 5% in 2024 to 4.7% in 2025 and 4.3% by 2026, further dampening global demand.
Despite these slower projections, the eurozone is expected to see modest improvement, with growth forecast to rise from 0.8% in 2024 to 1.0% in 2025 and 1.2% in 2026. However, the overall picture remains one of global economic stagnation, with risks mounting in terms of trade disruptions, persistent inflation and tightening financial conditions.
Inflation pressures and trade costs
Inflation, which had shown signs of moderation, has resurged in some economies due to rising trade costs and ongoing supply chain disruptions. The OECD projects that inflation in G20 economies will fall from 6.2% in 2024 to 3.6% in 2025 and 3.2% in 2026, but the inflationary impact of trade tariffs is still a concern.
As the report notes, higher trade costs in countries imposing tariffs could further push inflation up, with the most significant pressures being felt in economies with already tight labour markets.
For economies like Australia, which are heavily reliant on global trade, the rise in trade costs and slower global growth could have knock-on effects, particularly in key sectors like commodities.
Risks and potential upside
The OECD’s outlook also identifies several key risks that could worsen the economic slowdown. Prolonged trade fragmentation, with new tariff hikes and retaliatory actions, could disrupt global supply chains and deepen the economic slump. There is also the potential for more persistent inflation, especially in countries facing significant trade cost increases or struggling with tight labour markets.
On the other hand, the report points to a potential rebound if trade barriers are reversed and geopolitical tensions subside. A peaceful resolution to conflicts like the war in Ukraine could boost global confidence and investment, which would, in turn, benefit global trade flows..
Policy responses and long-term challenges
In light of these challenges, the OECD advises central banks to remain vigilant in managing monetary policy. While inflation has moderated in many regions, the report warns that rising trade costs could lead to wage and price pressures, making it crucial for policymakers to strike a balance between tightening monetary policy and sustaining economic growth.
The OECD also calls for more structural reforms to improve economic competitiveness.
“Investment has been in decline since the global financial crisis, and that has been holding back growth,” said OECD Chief Economist Álvaro Santos Pereira.
“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,” he added. “A bold policy reform agenda to boost investment can build a strong global economy for the 21st century.”