OECD cuts global growth forecast to 2.9% in 2025 and 2026 amid escalating trade war

Time of India

2 days ago

The Organisation for Economic Co-operation and Development (OECD) lowered its global economic growth forecast on Tuesday, citing the impact of a widening trade war driven by US President Donald Trump's tariff policies.
The Paris-based organization warned that these measures, particularly new tariffs, are set to significantly slow the world economy, with the United States expected to be among the hardest hit.
After a global growth rate of 3.3 percent in 2024, the OECD now predicts the world economy will grow by just 2.9 percent in both 2025 and 2026. This is down from its earlier forecasts in March, which projected 3.1 percent growth in 2025 and 3.0 percent in 2026, AFP reported.
Since that previous forecast, President Trump has launched a series of tariffs that have unsettled global financial markets.
"The global outlook is becoming increasingly challenging," the OECD stated, highlighting that "substantial increases" in trade barriers, tighter financial conditions, reduced business and consumer confidence, and greater policy uncertainty could have "marked adverse effects on growth" if they continue.
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The OECD revised its 2025 growth projection for the US from 2.2 percent down to 1.6 percent, with further deceleration expected in 2026 to 1.5 percent. This comes despite Trump's optimistic messaging, including a post on his Truth Social platform ahead of the OECD's report, stating: 'Because of Tariffs, our Economy is BOOMING!'
The OECD's ministerial meeting is being held in Paris on Tuesday and Wednesday, where US and EU trade officials are also expected to meet.
This follows Trump's threat of 50-percent tariffs on EU goods. Separately, the Group of Seven (G7) is also convening to discuss trade issues.
'For everyone, including the United States, the best option is that countries sit down and get an agreement,' said OECD chief economist Alvaro Pereira in an interview with AFP. 'Avoiding further trade fragmentation is absolutely key in the next few months and years,' he added.
Trump introduced a baseline 10-percent tariff on global imports in April and has announced increased tariffs on a number of countries, though implementation has been delayed until July to allow time for negotiations. Additionally, the president has imposed a 25-percent tariff on cars and plans to raise tariffs on steel and aluminium to 50 percent starting Wednesday.
In its report, the OECD emphasized that "weakened economic prospects will be felt around the world, with almost no exception," noting that "lower growth and less trade will hit incomes and slow job growth."
The US economy, which expanded by 2.8 percent in 2024, now faces a bleaker outlook.
The effective tariff rate on US merchandise imports has soared from two percent in 2024 to 15.4 percent—its highest level since 1938—according to the OECD. This spike, coupled with policy uncertainty, "will dent household consumption and business investment growth," the report said.
The organization also pointed to "high economic policy uncertainty, a significant slowdown in net immigration and a sizeable reduction in the federal workforce" as contributing factors to the US slowdown.
While inflation across the Group of 20 (G20) economies is projected to moderate to 3.6 percent in 2025 and 3.2 percent in 2026, the US remains an outlier. Inflation in the United States is forecast to climb to just under four percent by the end of the year—twice the Federal Reserve's target rate.
China's growth forecast has also been trimmed slightly, from 4.8 percent to 4.7 percent in 2025. China has been affected by triple-digit US tariffs, which have been temporarily eased.
Japan's growth outlook was revised down from 1.1 percent to 0.7 percent. However, the eurozone's forecast remains steady at one-percent growth.
'There is the risk that protectionism and trade policy uncertainty will increase even further and that additional trade barriers might be introduced,' Pereira wrote in the report.
'According to our simulations, additional tariffs would further reduce global growth prospects and fuel inflation, dampening global growth even more,' he warned.
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