The OECD has cut its global growth forecast for 2025 and 2026, blaming trade tensions sparked by U.S. President Trump’s sweeping tariff hikes and rising policy uncertainty.
The U.S. economy is projected to slow sharply, while China shows resilience through subsidies. The OECD warns global cooperation is vital to avoid deeper economic setbacks.
The Organization for Economic Cooperation and Development (OECD) has lowered its global growth forecast for 2025 and 2026, citing the escalating trade tensions triggered by U.S. President Donald Trump’s aggressive tariff policies.
According to the OECD’s latest Economic Outlook, released on Tuesday during its Ministerial Council Meeting in Paris, worldwide economic growth is now expected to slow from 3.3% in 2024 to 2.9% in both 2025 and 2026, marking a downgrade from the previous projections of 3.1% and 3.0%, respectively.
Trade war takes toll on U.S. growth
The report highlights that the United States will bear the brunt of the slowdown, with its growth forecast slashed to just 1.6% in 2025 and 1.5% in 2026, down from an earlier estimate of 2.2%. The OECD attributes the decline to the direct effects of higher tariffs, weakened consumer purchasing power, delayed business investment, and rising policy uncertainty.
President Trump’s sweeping tariff hikes, including 25% duties on automobiles and plans to double tariffs on steel and aluminum, have pushed the effective U.S. tariff rate to 15.4%, its highest since 1938. Retaliation from major trading partners has compounded the negative economic impact.
“If the U.S. were to impose an additional 10 percentage points in tariffs across the board, global output could drop by 0.3% over two years,” OECD Secretary-General Mathias Cormann warned. He called for “constructive dialogue” to resolve trade frictions and stabilize the global economy.
China cushioned by domestic support
China, the world’s second-largest economy, is expected to fare slightly better despite facing triple-digit tariffs on key exports. Thanks to government subsidies and increased social welfare spending, China’s GDP is projected to grow 4.7% in 2025 and 4.3% in 2026, only marginally lower than previous forecasts.
Eurozone holds steady, Japan slips
The euro area’s growth outlook remains stable at 1.0% in 2025 and 1.2% in 2026, supported by resilient labor markets, interest rate cuts, and renewed fiscal spending from Germany. However, Japan faces a steeper decline, with its forecast downgraded from 1.1% to 0.7%.
OECD Chief Economist Alvaro Pereira emphasized the broader risks of rising protectionism, noting that increased trade barriers and policy unpredictability threaten to suppress global demand, hurt job creation, and inflame inflationary pressures.
“Everyone loses in a trade war,” Pereira said, urging global leaders, particularly the U.S. and EU, to avoid further fragmentation and instead reach agreements to stabilize trade flows.
Inflation outlook and monetary policy
While inflation among G20 economies is expected to cool to 3.6% in 2025 and 3.2% in 2026, the U.S. is again an exception. Inflation in America is projected to rise to just under 4% by year-end, nearly double the Federal Reserve’s 2% target.
As a result, the Fed is now expected to hold interest rates steady through 2025, before gradually reducing the federal funds rate to 3.25%–3.5% by the end of 2026.
What lies ahead
The OECD warned that if global trade barriers continue to rise, the economic picture could worsen. Further tariff escalations, along with reduced immigration, tax cuts, and increased government spending, are expected to balloon the U.S. federal deficit to 8% of GDP by 2026, one of the highest for any major economy not at war.
“The outlook is becoming increasingly challenging,” the OECD concluded, stressing that cooperation, not confrontation, will be key to global economic stability in the years ahead.
