While artificial intelligence (AI) investment is helping to counter the impact of United States tariff hikes, the OECD cautions that renewed trade tensions and over-exuberant markets could quickly undermine global resilience.
In its latest Economic Outlook, the global policy forum reports that the world economy grew by 3.2% in 2025 and is expected to ease to 2.9% in 2026 before rebounding slightly to 3.1% in 2027.
While the forecast is unchanged from September, the OECD warns that any escalation in trade disputes could derail the outlook.
The global policy forum also notes that excessive optimism surrounding AI could set in motion a market correction if the sector fails to meet investor expectations.
While OECD Secretary-General Mathias Cormann described economic fallout from U.S. President Donald Trump’s tariff increases as limited, he expects the effects to gather momentum as companies exhaust the inventories they built up ahead of the changes.
The U.S. outlook has been revised upwards, with growth now expected to reach 2% in 2025, which is up on September’s 1.8% projection.
However, a slowdown to 1.7% is forecast for 2026, with the OECD now expecting strong AI-related investment, government spending, and anticipated interest rate cuts to offset pressure from import tariffs, reduced immigration and federal job reductions.
However, what worries the OECD is that large deficits and rising national debt place U.S. fiscal policy on an unsustainable path that will require major future tweaking.
Meanwhile, China’s economy is projected to expand by 5% in 2025, slightly up on previous forecasts before easing to 4.4% in 2026.
The report cites shrinking fiscal support and the growing impact of new U.S. tariffs on Chinese imports.
Aided by firm labour markets and increased German public spending, the eurozone’s 2025 forecast has edged up to 1.3%, while growth is expected to soften to 1.2% in 2026 with France and Italy tightening their budgets.
Japan is also expected to grow 1.3% in 2025, on the back of strong corporate earnings and investment, before decelerating to 0.9% in 2026.
Then there’s global trade growth, which is projected to pull back from 4.2% in 2025 to 2.3% in 2026 as tariff effects finally make their way to spending and investment decisions.
Lingering uncertainty over trade policies is expected to constrain any significant rebound.
Inflation is forecast to move gradually back towards central bank targets by mid-2027.
What also bothers OECD forecasters is the prospect of U.S. inflation peaking in mid-2026 as tariff-related costs filter through, while China and several emerging economies could see modest price increases as spare capacity declines.
Meantime, central banks across major economies are expected to hold or reduce interest rates over the next year.
Assuming inflation doesn’t surprise on the upside due to trade policy effects, the U.S. Federal Reserve is expected to make slight cuts by the end of 2026.
