Australia, US, UK and China among those facing mounting inflationary pressures, fiscal constraints and weak investment
The Organisation for Economic Co-operation and Development (OECD) has cut its global growth forecasts, warning that heightened trade barriers, tightening financial conditions, and deepening policy uncertainty—particularly stemming from US tariffs—are eroding confidence and undermining economic prospects worldwide.
Global GDP growth is now projected to slow from 3.3% in 2024 to just 2.9% in both 2025 and 2026. The downturn is expected to hit hardest in North America and China, with only modest improvements forecast for the euro area.
United States: Growth slows sharply as tariffs bite
The OECD slashed its 2025 US growth forecast to 1.6%, down from 2.2% in March, and expects it to fall further to 1.5% in 2026. It attributed the downgrade to a combination of sharply higher import tariffs under President Donald Trump, elevated policy uncertainty, declining net immigration, and reductions in the federal workforce.
The average effective US tariff rate has jumped from just over 2% in 2024 to 15.4% by mid-2025—the highest level since 1938—disrupting supply chains and inflating consumer costs. These changes, the OECD warned, are “holding back trade and investment” and “negatively impacting business and consumer confidence.”
Headline inflation in the US is now expected to climb to 3.9% by late 2025, closing in on 4%, and remain above target in 2026. The OECD cautioned that US firms highly exposed to imported inputs anticipate passing these costs onto consumers, compounding inflationary pressures.
Still, the OECD acknowledged that strong productivity growth in sectors exposed to AI, robotics and quantum technologies could widen the US lead over other economies—if trade tensions ease and investment recovers.
Australia: Growth and investment lag amid housing and net zero challenges
Australia’s growth forecast has also been downgraded, with GDP now expected to expand by just 1.8% in 2025 (down from 1.9%) and 2.2% in 2026 (down from 2.5% in December). The OECD cited structural issues in housing, climate transition, and weak business investment.
Business investment in Australia remains 30% below expected levels given prevailing economic conditions—one of the weakest among OECD countries. The report called on the Albanese government to urgently address the housing affordability crisis by easing zoning restrictions, boosting housing supply (especially social housing), and improving planning systems.
While Australia’s direct exposure to US tariffs is limited, falling commodity prices driven by weaker global trade could weigh on the domestic economy. Inflation is forecast to remain close to the 2.4% target, but growth in disposable income is still recovering from the 2022 trough.
Treasurer Jim Chalmers welcomed signs that Australia was “turning a corner” but acknowledged the risks of “conflict, fragmentation and tariffs,” noting the upcoming GDP data would reflect both global headwinds and recent natural disasters.
United Kingdom: Fiscal squeeze and trade tensions dampen outlook
UK growth is expected to remain modest at 1.3% in 2025 before slowing to just 1.0% in 2026. The OECD cited trade tensions, weak consumer confidence, and a “very thin fiscal buffer” as major headwinds.
Public debt is projected to climb to 104% of GDP by 2026, despite budget deficit improvements. The OECD warned that even small economic shocks could force the Treasury to breach fiscal rules. It urged Chancellor Rachel Reeves to consider targeted spending cuts and revenue-raising measures, such as updating council tax bands and closing tax loopholes.
The Labour government’s plans for defence, NHS and housing spending will be tested in Reeves’ upcoming Spending Review on 11 June. The OECD cautioned that without “balanced” fiscal consolidation, the UK risks lacking the room to respond to future crises.
While GDP grew 0.7% in the March quarter, the OECD noted that “momentum is weakening,” with business sentiment deteriorating and retail sales proving volatile. It expects inflation to ease gradually, though pressures from tariffs and food prices could persist longer than anticipated.
China: Slowing growth despite policy stimulus
China’s growth is forecast to decelerate from 5.0% in 2024 to 4.7% in 2025 and 4.3% in 2026, reflecting the impact of US tariffs and a still-recovering domestic economy. Tariff hikes have weighed on exports, while Beijing has responded with fiscal and monetary support, including infrastructure spending and credit easing.
The OECD noted that while growth in China remains relatively resilient, the collapse of the property sector and weak consumption continue to drag on broader momentum. Consumer confidence remains subdued, and inflation remains near zero.
Key risks and recommendations
The OECD identified key downside risks, including:
- Escalation of trade wars, particularly if retaliatory tariffs spread.
- Sticky inflation, especially in economies with high trade costs or tight labour markets.
- Financial instability, due to elevated equity valuations and fragile credit markets.
- Rising debt servicing costs, limiting fiscal space, particularly in developing economies.
The OECD’s top recommendation: reverse the rise in trade barriers. “Trade agreements to resolve existing tensions and lower or eliminate barriers should be accompanied by more efforts to enhance multilateral cooperation,” it said.
Other priorities include:
- Restoring fiscal discipline through credible medium-term plans.
- Boosting business investment, especially in digital, energy and housing sectors.
- Pursuing structural reforms to improve productivity, particularly in labour and tax systems.
Chief Economist Álvaro Pereira said governments face a historic opportunity. “If we are able to reduce uncertainty and strike trade deals, we might be on the cusp of something quite significant,” he said. “But without action, we risk drifting into stagnation.”
