New OECD Global Economic Reports Sounds Alarm on Tariff Concerns, Predicts Plummeting U.S. GDP Growth, and Says ‘Decisive Fiscal Action’ Needed to Sustain Debt

The latest report by the Organisation for Economic Co-operation and Development (OECD) paints a complex picture for the global economy, with resilience seen in 2024 giving way to slowing growth projections for 2025 and 2026. The report highlights persistent inflation, rising trade tensions, and policy uncertainty as major risks to global economic stability. The United States, in particular, faces a notable economic slowdown, exacerbated by domestic political uncertainty and newly imposed trade barriers that could weaken growth and increase inflation.

The report gives substantial room for change on either side, particularly saying that more restrictive trade policies could hinder U.S. Gross Domestic Product (GDP) growth more, despite already gloomy predictions. 

Global Growth: A Gradual Slowdown

The global economy grew by 3.2% in 2024, but the OECD expects it to slow to 3.1% in 2025 and 3.0% in 2026. The slowdown is largely driven by higher trade barriers in major economies, policy uncertainty, and weaker consumer confidence. Inflation, which was expected to moderate, has proven more persistent than previously forecast, putting additional strain on central banks.

Among major economies, United States GDP growth is projected to decline from 2.8% in 2024 to 2.2% in 2025 and further to 1.6% in 2026. This is a substantial decline, roughly 43% over the next 2 years, representing the sharpest potential declines since the Covid-19 pandemic and 2008 market crash.

The Eurozone will see sluggish growth, expected at 1.0% in 2025 and 1.2% in 2026. China’s economy is forecast to decelerate from 4.8% in 2024 to 4.4% by 2026, reflecting weaker demand and geopolitical challenges. Mexico, Canada and the United States are expected to be the hardest hit by more aggressive tariff policies. The OECD predicts a 10% raise in tariffs on all non-commodity imports would decrease GDP in those countries by 1.3%, 0.64% and 0.72%, respectively. 

The U.S. Economic Outlook: Trade Policy Uncertainty Poses Risks

The U.S. economy remained strong in 2024, but the OECD warns that protectionist policies and increased tariffs could create economic headwinds in the coming years. A key concern is the recent escalation of trade barriers, particularly tariff increases on imports from China, Mexico, and Canada, which could negatively impact American consumers and businesses.

The OECD conducted a simulation on trade fragmentation and found that further increases in trade restrictions could cut global output by 0.3% and add 0.4 percentage points to global inflation annually. The U.S. would be among the hardest-hit economies, facing:

• A 0.7% decline in output by year three of the simulation.
• Higher consumer prices due to increased import costs.
• Reduced corporate investment and economic confidence.

This trade policy volatility is further compounded by domestic political uncertainty ahead of the 2026 elections, with ongoing debates about fiscal policy, debt levels, and regulatory changes. The combination of these factors has led to a decline in consumer and business confidence.

Inflation: A Lingering Concern

Despite efforts by the Federal Reserve and other central banks, inflation remains above target levels. The OECD projects:

• U.S. inflation to be 2.8% in 2025 and 2.6% in 2026, slightly higher than previous estimates.
• G20 inflation to fall from 3.8% in 2025 to 3.2% in 2026, but still exceeding central bank targets in many economies.

The report cautions that if tariffs and geopolitical tensions continue to rise, inflationary pressures could persist, forcing central banks to keep interest rates elevated for longer than expected.

The Role of Policy: What Can Be Done?

The Federal Reserve and other central banks must navigate stubborn inflation and slowing growth carefully. The OECD recommends that policy rate reductions should only continue if inflation expectations remain well-anchored and trade tensions do not escalate further.

With U.S. debt levels continuing to climb, the OECD stresses the need for stronger fiscal discipline. The OECD says “Decisive fiscal actions are needed to ensure debt sustainability, preserve room for governments to react to future shocks and generate resources to meet large impending spending pressures.” Government spending, particularly on defense, infrastructure, and entitlement programs, is increasing pressure on public finances. The report urges policymakers to implement long-term budget reforms, enhance revenue streams, and avoid unsustainable debt accumulation.

The OECD warns against rising protectionism and encourages international cooperation to prevent further trade fragmentation. It suggests that:

• Lowering trade barriers could boost global GDP by 0.3% over three years.
• Regulatory reforms should focus on increasing competition and improving workforce skills.
• The U.S. should avoid policy swings that add to business uncertainty.