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Good morning,
Thank you for joining us for this launch of the OECD Economic Outlook.
Through to the end of 2024, the global economy showed real resilience – with GDP growth of 3.3% for the year.
But the global economic environment has become significantly more challenging since.
From January to March this year, GDP growth across the OECD area dropped abruptly to 0.1% over the previous quarter – the slowest rate of growth since the peak of the COVID-19 pandemic 5 years ago.
Bilateral tariff rates between the United States and its trading partners have risen sharply, with significant consequences for growth and inflation.
Measures of trade policy uncertainty based on print media have increased to unprecedented levels.
Near-term indicators point to a weakening of economic activity.
Surveys show declining consumer confidence, with policy uncertainty also undermining business confidence.
Since our last interim outlook we have revised our projections for global GDP growth downwards.
Global growth is projected to slow from 3.3% in 2024 to 2.9% for both 2025 and 2026.
This is down by 0.2 percentage points for 2025 and by 0.1 points for 2026, compared to our March Interim Outlook.
And it is 0.4% down for both 2025 and 2026 since our Economic Outlook six months ago in December 2024.
Higher trade costs are contributing to renewed inflationary pressures.
We expect inflation in G20 economies over this year and next to decline more slowly and remain higher for longer than previously foreseen in our December 2024 Outlook.
Turning to some country-specific developments.
In the United States, growth is expected to slow.
The main headwinds are lower export growth as a result of retaliatory measures from some trading partners;
The impact of high policy uncertainty; and
A marked slowdown in net immigration.
US GDP growth is projected to decline from 2.8% in 2024 to 1.6% in 2025 and 1.5% in 2026.
In the euro area, growth is expected to strengthen modestly – from 0.8% in 2024 to 1.0% in 2025 and 1.2% in 2026.
Improved credit conditions as a result of monetary policy easing and increased investment from NextGeneration EU funds will help offset the impact of pressures on trade.
In Japan, strong wage gains and business investment growth are supporting activity.
Growth is expected to improve from 0.2% in 2024 to 0.7% in 2025, and then to moderate to 0.4% in 2026, due to subdued external demand.
Emerging Asia – that is, China, India, Indonesia and 7 other Dynamic Asian Economies – continues to account for more than half of global growth.
Still, the increase in tariffs will weaken growth in China.
While fiscal measures, such as subsidies for consumer goods, help cushion the slowdown, growth is expected to moderate from 5.0% in 2024 to 4.7% in 2025 and 4.3% in 2026.
There are significant risks to the economic outlook.
The outlook for trade and trade policy is particularly uncertain.
Additional increases in trade barriers, or prolonged policy uncertainty, would further lower growth prospects and likely push inflation higher in countries imposing tariffs.
Our report estimates that, in a scenario in which US bilateral tariffs are raised by an additional 10 percentage points on all countries, as compared with the rates in force as of mid-May, global GDP would be about 0.3% lower after two years.
Canada, Mexico and the United States would be particularly affected, given their close trade integration.
By contrast, measures to reduce trade barriers, reverse tariff increases and address policy uncertainty could lift sentiment, lower trade costs, support growth, and help ease inflationary pressures.
Persistent inflation remains another key risk.
Goods price inflation ticked up at the beginning of the year, primarily due to rising food prices, while service price inflation has remained relatively high.
Inflation expectations by households have moved up in some economies, particularly the United States, likely related to an increase in expected costs for imports.
Higher inflationary pressures would require monetary policy to remain restrictive for longer, raising borrowing costs and slowing economic activity.
The key policy priorities in this environment are:
- Constructive dialogue to ensure a lasting resolution to current trade tensions,
- Prudent monetary and fiscal policy, and
- Ambitious structural reforms to reinvigorate longer-term growth.
In relation to the higher trade policy uncertainty and tariffs over the past two months:
Our key recommendation is for governments to engage with each other to address issues in the global trading system co-operatively;
To talk the issues through, among market-based democracies and beyond with any partner countries around the world prepared to engage in good faith conversations about how best to make the global rules based trading system fairer and work better for everyone.
The OECD is, in many ways, a perfect platform for some of those very important multilateral conversations.
And to put some numbers around the opportunity, according to our analysis, a broad-based global decline of tariff rates by 1.5 percentage points could boost GDP by 0.2% in G20 advanced economies and almost 0.3% in G20 emerging economies within 3 years, while also helping to bring inflation down.
The OECD’s unique data, analysis, standards and tools, in areas ranging from market distorting subsidies, to the importance of competitive neutrality, sound corporate governance of state-owned enterprises and responsible business conduct can provide important input into key bilateral and multilateral conversations about improving global trading arrangements.
Monetary policy will need to be carefully calibrated.
Central banks should remain vigilant in view of the high policy uncertainty and the potential for higher trade costs to affect wages, prices and demand.
If inflation expectations remain well-anchored and trade tensions do not escalate, policy rate reductions can continue in countries where inflation is projected to moderate or stay subdued.
In our projections, we expect continued policy rate reductions in several large OECD economies, including the euro area, the United Kingdom, and the United States.
On fiscal policy:
Governments need to focus on rebuilding fiscal space and on preserving room for future spending pressures.
Last year, public debt in the OECD stood at 112% of GDP – up from 73% in 2007.
And debt servicing costs are on the rise – our Global Debt Report released in March shows that government interest payments increased as a share of GDP in about two-thirds of OECD countries in 2024, reaching 3.3% on average.
In parallel, defence spending has been increasing in Europe – though is still below countries’ own targets –, forcing difficult choices about the pace and the composition of fiscal adjustment.
Pension and social policies, for example, the two largest items in government budgets, could be made more effective through better work incentives for older people and targeting of social benefits.
While responding to the immediate economic challenges, we must also lay the groundwork for stronger growth prospects in the medium and long term.
Potential per capita growth for the OECD this year is estimated at 1.3%, down from around 2% in the 1990s.
Job creation has been a central driver of growth in recent years, while productivity growth and investment have both declined significantly.
Ambitious structural reforms are key to unlocking higher investment and productivity, ensuring they once again become strong drivers of growth, including by:
- Boosting competition and reducing barriers to firm entry;
- Lowering regulatory costs for businesses;
- Reducing policy uncertainty;
- Improving opportunities for financing, especially for young, innovative firms; and
- Ensuring a skilled and adaptable workforce.
In closing,
While we are facing significant economic headwinds, we have the tools to make progress on key structural reforms, support productive international co-operation for greater policy certainty, and foster strong, sustainable, inclusive and resilient growth.
Thank you – and with that, I pass the floor to our Chief Economist, Alvaro Pereira, to present the details of our analysis.
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