The Organisation for Economic Co-operation and Development (OECD) has released its latest Economic Outlook on 17 March 2025, highlighting both resilience and growing risks in the global economy.
While 2024 saw stable growth, projections for 2025 and 2026 indicate a slowdown amid policy uncertainty, trade fragmentation, and lingering inflationary pressures.
Global Growth Projections
The world economy expanded at an annualised rate of 3.2% in the latter half of 2024. However, global GDP growth is now forecast to decline to 3.1% in 2025 and further to 3.0% in 2026. Higher trade barriers in major economies and persistent policy uncertainties are expected to dampen investment and consumer spending.
In the United States, growth is projected to decelerate from its recent strong pace, slowing to 2.2% in 2025 and 1.6% in 2026. The euro area is forecast to experience subdued expansion, with GDP growth of 1.0% in 2025 and 1.2% in 2026 due to ongoing economic uncertainties. Meanwhile, China’s growth is set to moderate from 4.8% in 2024 to 4.4% in 2026, reflecting structural challenges and weaker external demand.
Inflationary Pressures Persist
Despite some moderation, inflation remains a key concern. Headline inflation has edged up in multiple economies, with services prices remaining particularly high. The median inflation rate across OECD economies stands at 3.6%.
In G20 economies, inflation is projected to ease from 3.8% in 2025 to 3.2% in 2026. However, underlying inflation is expected to remain above central bank targets in many countries by 2026, necessitating continued monetary policy vigilance.
Risks from Trade Fragmentation and Policy Uncertainty
The OECD warns that escalating trade restrictions could significantly impact global economic activity. A scenario where the United States raises tariffs on non-commodity imports, with reciprocal measures from trade partners, could reduce global GDP by 0.3% within three years. Additionally, inflation could rise by 0.4 percentage points annually over the same period.
If such measures coincide with increased financial market volatility and policy uncertainty, consumer and corporate spending could decline further, exacerbating economic downturn risks.
Policy Recommendations
Monetary Policy: Maintaining Stability Amid Uncertainty
Central banks are advised to remain vigilant, particularly in light of potential trade-related cost increases. If inflation expectations remain anchored and trade tensions do not escalate, policy rate reductions should proceed in economies where inflation is projected to decline and aggregate demand is subdued.
Fiscal Policy: Ensuring Debt Sustainability
Governments are urged to adopt decisive fiscal measures to stabilise debt levels while maintaining flexibility to address future economic shocks. This includes efforts to control spending, enhance revenue collection, and implement medium-term fiscal adjustment plans tailored to individual country circumstances.
Structural Reforms: Strengthening Economic Foundations
The OECD stresses the importance of structural reforms to bolster long-term economic growth. Key measures include regulatory changes to enhance market competition, education and skills development initiatives, and labour market reforms to improve mobility and productivity. These reforms are critical to fostering innovation, increasing labour force participation, and ensuring that economies remain resilient in an increasingly uncertain global environment.
Outlook: Cautious Optimism with Considerable Risks
While the global economy demonstrated resilience in 2024, the OECD’s latest forecast underscores the challenges ahead. Trade barriers, inflationary pressures, and geopolitical uncertainties remain substantial threats to economic stability.
Policymakers must navigate these risks carefully, employing prudent monetary, fiscal, and structural strategies to support sustainable growth and mitigate potential downturns.
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