OECD expects tariff blows ahead despite expectation-defying global growth

Global growth is proving sturdier than expected, but the hit from higher U.S. import tariffs has not fully shown up yet. For now, strong spending on artificial intelligence in the United States is supporting activity, while government measures are softening China’s slowdown.

The Paris-based OECD said many companies have cushioned the tariff shock by accepting lower profit margins and drawing down inventories after stockpiling ahead of recent hikes that pushed the effective U.S. tariff rate on goods to an estimated 19.5% by end-August, the highest since 1933.

The OECD has upgraded projections for 2026

The OECD said the world economy is now expected to slow only slightly to 3.2% in 2025 from 3.3% in 2024 instead of the 2.9% it forecast in June. The outlook for 2026 stays at 2.9%. The report says the temporary lift from inventory building is fading, and the step-up in trade barriers will increasingly weigh on investment and cross-border commerce.

U.S. growth is seen easing to 1.8% in 2025, higher than the 1.6% estimate in June, after 2.8% in 2024, before slowing to 1.5% in 2026, unchanged from the prior forecast. The OECD said an AI-investment boom, fiscal support and further Federal Reserve rate cuts should offset part of the drag from higher tariffs.

China’s expansion is expected to cool in the second half of the year as exporters lose the rush to ship before U.S. duties take hold and as fiscal support tapers. In the euro area, the lift from lower interest rates is being blunted by weak trade and geopolitical tensions. The bloc is projected to grow 1.2% in 2025 and then slow down to 1.0% in 2026.

Japan is set to benefit this year from strong corporate earnings and a rebound in investment, taking growth to 1.1%, up from 0.7% previously. The UK outlook was nudged higher to 1.4% growth in 2025 from 1.3%, while the 2026 forecast stays at 1.0%.

Central banks expected to cut rates

The OECD said most major central banks are expected to cut interest rates further or keep policy loose over the coming year if inflation keeps receding. It projects additional Fed rate reductions as the U.S. labor market cools, unless the tariff shock fuels broader price pressures.

Australia, Britain, and Canada are seen lowering borrowing costs gradually. The European Central Bank is expected to hold policy steady with inflation close to its 2% goal, while the Bank of Japan is likely to raise rates as it continues to unwind ultra-loose settings.

The OECD also upgraded its view for 2025 itself, saying, “Global growth was more resilient than anticipated in the first half of 2025, especially in many emerging-market economies.”

It added: “Industrial production and trade were supported by front-loading ahead of higher tariffs. Strong AI-related investment boosted outcomes in the United States and fiscal support in China outweighed the drag from trade headwinds and property market weakness.”

Even so, the report warns the tariff shock is still working its way through the global economy. “US bilateral tariff rates have increased on almost all countries since May. The overall effective US tariff rate rose to an estimated 19.5% at the end of August, the highest rate since 1933,” the OECD said.

Headline inflation across the G20 is now expected to be 3.4% in 2025, slightly below June’s 3.6% forecast. For the U.S., the inflation projection was cut to 2.7% for 2025 from 3.2%.

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