OECD: Global economy heading for weakest growth since Covid-19

2025-06-03 14:02:00, Ekonomi CNA

The organization lowers forecasts and warns that the US will be particularly hard hit.

The global economy is heading for its weakest period of growth since Covid-19, as Donald Trump's trade war hurts growth in major economies, including the US, according to forecasts from the Organisation for Economic Co-operation and Development (OECD).

The organization lowered the outlook for global output and most major G20 economies, while warning that agreements to ease trade barriers would be key in reviving investment and avoiding higher prices.

Global growth is expected to be 2.9% in 2025 and 2026, the OECD said in its latest outlook. The figure has exceeded 3% every year since 2020, when output fell due to the pandemic.

US growth will slow in particular, falling from 2.8% last year to just 1.6% in 2025 and 1.5% in 2026, while a period of higher inflation will prevent the Federal Reserve from cutting rates this year, the OECD said.

The latest estimate represents a downgrade from its March interim forecasts, which preceded the US president's tariff announcements on April 2. Even then, the OECD warned of a significant impact stemming from the Trump administration's tariffs and related policy uncertainty.

Trump has since partially reduced some duties, but the increase in the average effective US tariff rate is still "unprecedented", from 2.5% to over 15% - the highest since World War II, the OECD noted.

The organization also lowered its 2025 forecasts for G20 countries, including China, France, India, Japan, South Africa and the United Kingdom, compared with the March outlook.

Álvaro Pereira, the OECD’s chief economist, said countries urgently needed to reach agreements that would lower trade barriers. “Otherwise, the impact on growth will be quite significant,” he said. “This has massive consequences for everyone.”

Compared to the OECD's last full outlook in December, growth prospects for almost all countries have declined, Pereira said.

Another obstacle to growth and investment is uncertainty about the direction of global trade policy. US tariff swings have played a role, as Trump has imposed tariffs on China before partially rolling back the measures, while threatening higher tariffs on other economies, including the EU.

Trump has also pledged to impose a series of sectoral barriers, including doubling taxes on steel and aluminum imports to 50%.

The OECD prepared the economic forecasts assuming that tariff rates would be kept unchanged from mid-May, despite setbacks, including a court ruling last week that found Trump had exceeded his authority in imposing the April 2 tariffs.

Partly as a result, U.S. inflation is now expected to rise to nearly 4% by the end of 2025 and remain above the Federal Reserve's target in 2026, meaning the central bank will probably wait until next year before cutting interest rates, the OECD said.

Recent indicators showed a "marked cooling" of real GDP growth in the US, along with a significant rise in inflation expectations, she warned.

Overall, the OECD's outlook for this year has been lowered for about three-quarters of G20 members compared with its March interim forecast.

China's growth will slow from 5% last year to 4.7% in 2025 and 4.3% in 2026, according to the new outlook, while the Eurozone will expand by just 1% this year and 1.2% in 2026.

Japan's economy will grow by just 0.7% and 0.4% this year and next. The UK economy was forecast to expand by 1.3% this year and 1% in 2026 - a reduction from the expected rates of 1.4% and 1.2% respectively in March.

Global trade will expand by 2.8% in 2025 and 2.2% in 2026, significantly lower than the OECD's December forecasts.

Fiscal risks are rising along with trade tensions, the OECD warned, with demands for more defense spending expected to add to spending pressures.

“Historically high” stock valuations are increasing sensitivity to negative shocks in financial markets.

A long period of weak investment has exacerbated the long-term challenges facing OECD economies, and this is further damaging growth prospects./ Monitor Magazine