The global economy is entering a period of growing uncertainty and slower expansion. According to the OECD’s latest Economic Outlook, persistent trade barriers, tighter financial conditions, falling business confidence, and heightened policy ambiguity are projected to weaken growth over the next two years. The world economy, which showed signs of resilience after the pandemic recovery, now faces renewed challenges that could test its stability and long-term growth potential.
Global Growth Set to Slow Further
The OECD projects global growth to decline from 3.3% in 2024 to 2.9% in both 2025 and 2026. This slowdown reflects weakening trade, cautious consumer spending, and tightening credit conditions across major economies. The most significant deceleration is expected in the United States, Canada, Mexico, and China, while smaller adjustments are forecast in other advanced and emerging markets.
In the United States, GDP growth is expected to fall from 2.8% in 2024 to 1.6% in 2025 and 1.5% in 2026, largely due to tighter monetary policy and reduced consumer demand. The Euro Area is projected to see only a modest pickup, with growth rising gradually from 0.8% in 2024 to 1.2% by 2026, driven by slight improvements in investment and consumption.
Meanwhile, China’s economy—a key engine of global growth—is projected to moderate from 5.0% in 2024 to 4.3% in 2026, reflecting structural headwinds such as weaker property markets and subdued exports.
Inflation Pressures and Trade Costs on the Rise
Inflationary pressures remain a concern despite earlier signs of easing. Several economies are now witnessing renewed price increases due to higher trade costs and new tariff measures. While declining commodity prices may offset some of the impact, rising import costs continue to challenge policymakers.
The OECD forecasts that headline inflation across G20 economies will decline from 6.2% in 2024 to 3.2% in 2026, but the path remains uneven. Economies that have raised tariffs are expected to experience higher inflation compared to those maintaining open trade policies.
This trend underlines how trade fragmentation—through tariffs, export controls, and retaliatory actions—can drive costs higher for both businesses and consumers, undermining purchasing power and investment confidence.
A Shift from Resilience to Uncertainty
“The global economy has shifted from a period of resilient growth and declining inflation to a more uncertain path,” said OECD Secretary-General Mathias Cormann. He emphasized that rising policy uncertainty and deteriorating trade relations are eroding trust among businesses and investors.
Cormann urged governments to engage constructively to preserve the benefits of open, rules-based trade, which supports innovation, productivity, and sustainable growth. Maintaining cooperative trade relations, he noted, remains essential to counter the growing headwinds of protectionism.
Key Risks Threatening the Global Economy
The OECD highlights several downside risks that could intensify the slowdown if left unaddressed. Chief among them is trade fragmentation—the spread of tariffs and retaliatory measures that disrupt supply chains and limit access to global markets.
If trade barriers expand further, cross-border production networks could suffer, especially in manufacturing and technology sectors that depend on global components.
Persistent inflation presents another challenge. In countries where wages are rising faster than productivity, inflation could become entrenched, forcing central banks to tighten monetary policy further. This would raise borrowing costs, reduce investment, and constrain job creation.
Meanwhile, higher debt repayments threaten to increase fiscal pressure on governments worldwide. For low-income countries, tighter global financial conditions pose significant risks, as they rely heavily on external borrowing.
Although equity markets have rebounded from recent lows, volatility remains high, reflecting investor unease about policy directions and geopolitical tensions.
Potential Bright Spots: Trade Cooperation and Peace Diplomacy
Despite the challenges, the OECD notes potential upside scenarios that could strengthen global prospects. A reversal of recent trade restrictions, for instance, would immediately boost confidence, encourage investment, and help reduce inflationary pressures.
Additionally, a peaceful resolution of major geopolitical conflicts—including Russia’s war in Ukraine and tensions in the Middle East—could restore market stability and improve the outlook for global trade and energy prices.
Restoring cooperation among nations, rebuilding supply chain trust, and promoting diplomatic solutions are among the key steps that could reignite global momentum.
Central Banks Face a Balancing Act
As inflation eases in some regions but persists in others, central banks face the difficult task of balancing stability with growth. The OECD advises monetary authorities to remain vigilant and flexible, especially given the unpredictable impact of new trade barriers on wages and prices.
If inflation expectations remain under control and global trade tensions do not worsen, gradual policy rate reductions could continue in economies showing subdued demand. However, premature easing could risk reigniting inflation, while excessive tightening may stifle growth.
The message is clear: central banks must navigate a delicate path, guided by data and careful coordination with fiscal policy.
Fiscal Discipline and Sustainable Public Spending
Governments also face growing fiscal challenges. Rising debt levels and mounting spending demands—from healthcare to defense and climate transition—are testing public finances. The OECD stresses the importance of long-term debt sustainability and maintaining sufficient fiscal space to respond to future shocks.
To achieve this, policymakers should contain unnecessary expenditures, reallocate resources efficiently, and enhance revenue systems through fair taxation. Establishing credible, medium-term fiscal plans tailored to national contexts can help ensure economic resilience and investor confidence.
The Case for Structural Reform and Investment Revival
Weak investment remains one of the most pressing structural problems in the global economy. OECD Chief Economist Álvaro Santos Pereira noted that investment levels have been sluggish since the global financial crisis, constraining productivity and innovation.
“Greater investment in the digital and knowledge-based economy is a positive development,” Pereira said. “But public investment remains stagnant, and housing investment is failing to keep pace with demand.”
The OECD calls for a bold structural reform agenda that encourages innovation, improves business conditions, and enhances global competitiveness. Investments in infrastructure, clean energy, education, and technology can serve as catalysts for stronger, more inclusive growth.
By supporting entrepreneurship and sustainable industries, governments can help create jobs, reduce inequality, and accelerate the transition toward a more resilient global economy.
Frequently Asked Questions:
What does it mean that global economic confidence is faltering?
It means that businesses, investors, and consumers worldwide are losing faith in future economic stability and growth. This decline in confidence often leads to reduced investment, slower trade, and weaker job creation.
How are trade policy conflicts affecting global growth?
Trade policy turmoil—such as tariffs, sanctions, and trade barriers—disrupts international supply chains, raises costs, and limits market access. These actions weaken global trade flows, reduce competitiveness, and slow down economic expansion.
Which regions are most affected by the slowdown in global growth?
According to the OECD, the most significant slowdowns are expected in the United States, Canada, Mexico, and China, while Europe and other regions will experience smaller declines in growth rates.
How is inflation connected to trade policy uncertainty?
Trade restrictions increase import costs and production expenses, pushing prices higher. Although lower commodity prices may offset this effect, persistent tariffs and trade disruptions continue to fuel inflation in several economies.
What is the OECD’s growth forecast for 2025 and 2026?
The OECD projects global GDP growth to slow from 3.3% in 2024 to 2.9% in both 2025 and 2026, indicating a weaker global performance driven by trade disruptions and policy uncertainty.
What role does consumer and business confidence play in economic growth?
Confidence drives spending and investment decisions. When uncertainty rises—due to trade wars, inflation, or political instability—businesses delay investments and consumers reduce spending, which slows economic activity.
Can improved global cooperation help restore growth?
Yes. Open dialogue and multilateral cooperation can reduce trade tensions, boost investment confidence, and promote innovation. A coordinated global response is key to rebuilding trust and sustaining economic recovery.
Conclusion
The world economy stands at a delicate crossroads, where rising trade tensions, inflationary pressures, and waning confidence threaten to undermine years of steady progress. The OECD’s outlook makes it clear that the global growth engine is slowing, with uncertainty weighing heavily on businesses, consumers, and policymakers alike.Yet, the path forward does not have to be bleak. By restoring international cooperation, reducing trade barriers, and embracing bold structural reforms, nations can rebuild trust and reignite economic momentum. Encouraging innovation, investing in sustainable industries, and maintaining sound fiscal and monetary policies will be essential for fostering long-term resilience.
