OECD slashes global growth forecast amid rising trade barriers and inflation

The Organisation for Economic Co-operation and Development (OECD) has sharply downgraded its global economic growth outlook, warning that a combination of rising trade barriers, policy uncertainty, and persistent inflation could slow growth more than anticipated.

According to the OECD's latest Economic Outlook, global GDP growth is projected to decelerate to just 2.9 per cent in 2025 and 2026 from 3.3 per cent in 2024—substantially below previous projections.

The report attributed the slowdown to escalating trade tensions, particularly the fallout from the Trump administration's tariff policies, which have had a ripple effect on global supply chains and business investment.

What is dragging global growth?

The OECD's report highlights that the global economic outlook has grown more challenging as trade barriers have risen sharply. New tariffs, particularly between the US and several major trading partners, have pushed global trade to a standstill.

The OECD warns that further protectionist measures could exacerbate inflationary pressures, disrupt global supply chains, and increase economic policy uncertainty, all of which are likely to dampen growth prospects for many countries.

“Substantial increases in trade barriers and tighter financial conditions will have marked adverse effects on global growth if they persist,” the OECD report states.

Rising trade costs, especially tariffs, are pushing up inflation, although this may be partially offset by falling commodity prices in some regions. Despite the anticipated slowdown, the OECD also notes that a reversal of recent tariff hikes could provide a much-needed boost to global economic activity and ease some inflationary pressures.

In the United States, the forecast for economic growth has been cut significantly. The US economy is now expected to expand at only 1.6 per cent in 2025, a sharp decline from earlier forecasts. The main reasons for the downgrade are the increase in tariff rates, retaliatory measures from trading partners, and policy uncertainty surrounding the trade war.

This slowdown is exacerbated by rising inflation, which the OECD expects will remain above target, staying near 4 per cent by the end of 2025. Higher import prices, resulting from tariffs, are eroding consumer purchasing power, while economic policy uncertainty has also caused businesses to hold back on investment.

While the Eurozone is seeing more moderate growth expectations, China’s growth has also been impacted. The OECD revised its forecast for China down to 4.7 per cent for 2025, slightly lower than earlier predictions. Despite this, China’s government is trying to offset the economic damage through fiscal stimulus and welfare transfers aimed at boosting domestic demand.

On the other hand, India’s real GDP is projected to grow by 6.3 per cent in fiscal year 2025-26 and 6.4 per cent in 2026-27. The report predicts that private consumption will gradually strengthen, driven by rising real incomes that are helped by moderate inflation, recent tax cuts and a strengthening of the labour market.

Investment in India will be supported by declining interest rates and substantial public capital spending, but higher US tariffs will weigh on exports. Inflation will remain contained at around 4 per cent as economic activity grows around the trend. A less benign monsoon season or higher global commodity prices could drive up food prices and inflation.

Inflation and investment woes

Globally, inflation is expected to remain elevated for longer than anticipated. The OECD’s inflation forecast for 2025 has been revised upward to 4.2 per cent from 3.7 per cent in earlier projections, with inflation expected to remain above 3 per cent in 2026 as well. This persistent inflation is largely attributed to ongoing trade disruptions and the inflationary effects of tariffs, which are also expected to stifle investment.

Investment has been sluggish in many advanced economies since the global financial crisis, with weak business confidence further exacerbating the problem. The OECD emphasises that without a significant increase in investment, especially in public infrastructure and housing, many economies will face longer-term stagnation, weakening their potential growth.

The OECD report also stressed that a major driver of the slowdown is the weakening of business investment due to heightened uncertainty and inflationary pressures. This situation, combined with a lack of capital accumulation, threatens the ability of advanced economies to regain a strong growth trajectory.

Policy solutions: A path to resilient growth

To mitigate these challenges, the OECD suggests several key policy interventions. First, reducing international trade barriers and addressing policy uncertainty could stimulate growth and reduce inflationary pressures. Governments are encouraged to diversify supply chains, encourage competition, and support entrepreneurship to reinvigorate investment.

Monetary policy must also remain vigilant to keep inflation in check while fostering an environment conducive to investment. Central banks, according to the OECD, should maintain low interest rates where inflation expectations are under control and adjust rates as necessary to support demand.

Finally, the OECD advises governments to focus on reducing public debt ratios and rebuilding fiscal space to respond to future economic shocks, particularly those related to climate change and population ageing.

With the global outlook facing significant headwinds, the OECD stresses that coordinated international action to lower trade barriers and reduce policy uncertainty is essential to ensure a more robust and resilient global economy in the years ahead.