The Japan Times - OECD lowers global growth projections over tariffs, uncertainty

"We are navigating troubled waters," said the OECD's chief economist Alvaro Santos Pereira as he summed up the world's economic situation in the coming months, with inflation set to rise.

US President Donald Trump's return to the White House is in part responsible for the coming turbulence, the OECD said in its report, with his protectionist policies sparking trade wars and driving up inflation.

While global economic activity remained "resilient" in 2024 with a 3.2 percent increase in GDP, the OECD trimmed back its 2025 projection from 3.3 percent growth to 3.1 percent.

That was due to "higher trade barriers in several G20 economies and increased geopolitical and policy uncertainty weighing on investment and household spending".

The Paris-based OECD's projections were based primarily on weaker expected growth in the United States and the eurozone.

US growth is expected to be 2.2 percent in 2025, down from the OECD's 2.4 percent projection in December, before falling to 1.6 percent in 2026 -- a drop of 0.5 percentage points on the OECD's previous forecast.

Likewise, the eurozone growth projection is down from 1.3 percent three months ago to just 1.0 percent, but will continue its upward trajectory from 0.7 percent in 2024, reaching 1.2 percent in 2026.

China, meanwhile, is expected to maintain healthy growth at 4.8 percent in 2025 and 4.4 percent the following year.

- 'Higher than expected' inflation -

But trade wars sparked by Trump's protectionist policies are due to drive inflation "to be higher than previously expected" levels.

"Core inflation is now projected to remain above central bank targets in many countries in 2026, including the United States," added the OECD, which advises industrialised nations on policy matters, issues regular forecasts on the global economy and identifies factors that could impact growth.

US inflation is now expected to accelerate to 2.8 percent in 2025, up 0.7 percentage points from the previous projection and above the 2.5 percent figure from 2024.

The OECD said its projections took into account new tariffs between the United States and its neighbours Canada and Mexico, both of whom are likely to be heavily affected by Trump's policies.

The OECD slashed its projection of Canada's growth from 2.0 percent to just 0.7 percent, while it now forecasts a 1.3 percent contraction in Mexico's economy having previously predicted 1.2 percent growth for 2025.

The OECD also took into account new tariffs on trade between the United States and China and those imposed on steel and aluminium, but not any threatened reciprocal levies nor any concerning the European Union.

"European economies will experience fewer direct economic effects from the tariff measures" than Canada and Mexico, the OECD said, "but heightened geopolitical and policy uncertainty is still likely to restrain growth".

For the second report in succession, the OECD has lowered its growth expectations for both France and Germany -- down to 0.8 and 0.4 percent respectively.

Britain's forecast is also down to just 1.4 percent, with only Spain amongst major European nations bucking the trend and set to maintain its recent strong performance with 2.6 percent growth predicted in 2025.

The OECD said that "significant risks remain" as further tit-for-tat tariffs between major global economies "would hit growth around the world and add to inflation".

However, one element that could ease the short-term pressure on the global economy is European nations' vows to boost defence spending in the face of the threat from Vladimir Putin's Russia and reluctance from Trump to continue Washington's bankrolling of NATO.

An increase in defence spending could "support growth in the near-term, but potentially add to longer-term fiscal pressures", the OECD said.

K.Inoue--JT