Quick Bite – OECD lowers growth forecasts
The OECD released its Economic Outlook report on 3 June and titled it “Tackling Uncertainty, Reviving Growth”. The key message was not unexpected: global trade uncertainty introduced by the Trump Administration would have a cost on global economic growth.
The closely watched report notes that the global outlook is becoming increasingly challenging. Substantial increases in trade barriers, tighter financial conditions, weakened business and consumer confidence, and elevated policy uncertainty all pose significant risks to growth. If these trends continue, they could substantially dampen economic prospects.
Rising trade costs—particularly in countries implementing new tariffs—are likely to fuel inflation, although this may be partly offset by softer commodity prices. Risks to the outlook remain substantial. Key concerns include further escalations or sudden shifts in trade policies, more cautious behaviour from consumers and businesses, and continued repricing of risk in financial markets. Inflation may also stay elevated for longer than anticipated, especially if inflation expectations continue to rise. On the upside, an early reversal of recent trade barriers could boost economic growth and help ease inflationary pressures.
The key numbers released show a revision to projected global GDP growth for 2025 from 3.1% to 2.9%, and a revision to growth in 2026 from 3.0% to 2.9%.
Source: OECD
Global GDP growth is projected to slow from 3.3% in 2024 to 2.9% this year and next year (based on the assumption that tariff rates as of mid-May are sustained). The slowdown is concentrated in the United States, Canada, Mexico and China, with other economies expected to see smaller downward adjustments. Growth through 2025 is expected to be especially weak, with global output rising by just 2.6% over the year to the fourth quarter, and by only 1.1% in the United States.
For Australia, which grew a soggy 1.1% in 2024, growth in 2025 is forecast at 1.8% in 2025 and accelerating to 2.2% in 2026. The OECD sees growth in China slowing from 5.0% in 2024 to 4.7% in 2025 and 4.3% in 2026. India remains a standout amongst large economies, with growth in 2024 of 6.2%, rising to 6.3% in 2025 and 6.4% in 2026.
Inflation may prove more persistent than expected, and is now projected to be slightly higher through 2026 than previously expected. OECD-wide inflation is projected to reach 4.2% in 2025, up from 3.7% in the December projections, and 3.2% in 2026, compared to an earlier estimate of 2.9%.
Source: OECD
The OECD report further notes that weak investment has weighed on potential output growth since the global financial crisis (GFC), despite historically low financing costs and strong corporate profitability. The slowdown in capital accumulation largely reflects the lasting impact of two major shocks – the GFC and the COVID-19 pandemic. Housing and public investment have also slowed in many countries, contributing to a deteriorating housing affordability and public infrastructure.
Source: OECD
To conclude, the OECD has its 4 point prescription for government and central bank policies summarised as follows:
- Lower international trade barriers and tensions to boost growth.
- Monetary policy needs to remain vigilant.
- Reduce public debt ratios and rebuild fiscal space.
- Reignite investment for more resilient growth.
