OECD Economic Outlook, Volume 2025 Issue 2

1. General assessment of the macroeconomic situation

Introduction

The global economy has proved more resilient than expected this year, but underlying fragilities remain. Supportive macroeconomic policies, improved financial conditions fuelled by optimism about the potential impact of new technologies, and rising AI-enabling investment and trade have helped underpin demand to a varying extent across economies, cushioning the headwinds from elevated policy uncertainty and rising barriers to trade. The full effects of higher tariffs have yet to be felt, but are becoming increasingly visible in spending choices, business costs and consumer prices, especially in the United States. Global trade growth has moderated after strong front-loading of merchandise trade early in the year ahead of anticipated tariff increases, and inflation has yet to return to target in some countries. There are also some signs of weakening labour demand across economies. Global GDP growth is projected to slow from 3.2% in 2025 to 2.9% in 2026, before picking up to 3.1% in 2027. Further policy interest rate reductions are expected, and little fiscal tightening is anticipated in many countries despite the need to address rising budgetary pressures. Labour markets are projected to continue to ease, putting additional downward pressure on labour cost growth and inflation. Annual consumer price inflation in the G20 countries is expected to moderate to 2.8% and 2.5% in 2026 and 2027 respectively, from 3.4% this year. By mid-2027, inflation is projected to be back to target in almost all major economies.

These projections are subject to substantial risks, which may interact with each other. Further increases or swift changes in trade barriers, including the application of higher tariff rates to a broader range of goods or stricter controls on the export of critical products such as rare earth elements, would weaken growth, add to policy uncertainty, and generate significant disruptions in global supply chains. Weaker‑than‑expected growth, lower-than-expected returns from net AI investment, or upside inflation surprises could all trigger widespread risk repricing given stretched asset valuations and optimism about corporate earnings, and be amplified by forced asset sales by highly leveraged non‑bank financial intermediaries (NBFIs). The high price volatility of crypto-assets and the growing interconnectedness of NBFIs with the traditional financial system also raise financial stability risks. Failure to make progress in tackling fiscal vulnerabilities could prompt additional increases in long-term sovereign bond yields, tightening financial conditions, raising debt service burdens and adversely affecting growth prospects. On the upside, agreements that result in a reversal of the increase in trade barriers would provide additional support to growth and reduce inflation pressures. Businesses may also prove more adaptable than expected when faced with significant adverse shocks and elevated uncertainty, limiting the downside impact on growth. The future productivity benefits of new technologies could also emerge more rapidly and more widely than anticipated, providing an additional impetus to global growth prospects.

Against this backdrop, the key policy priorities are to ensure a lasting decline in trade tensions, policy uncertainty and inflation, address emerging financial stability risks, establish a credible fiscal path to debt sustainability, and implement ambitious reforms to strengthen productivity growth.

• Countries need to find ways of working together within the global trading system and to make trade policy more predictable. Agreements to ease trade tensions and deepen trade relations would improve policy certainty and strengthen the prospects for investment, productivity and output growth. Additional areas where opportunities exist for reforms include further improvements in trade facilitation, reductions in regulatory barriers that impede access to national services markets, and initiatives to enhance the cross-border digital delivery of services.

• Central banks should remain vigilant and react promptly to shifts in the balance of risks to price stability. Provided inflation expectations remain well anchored, policy rate reductions should continue in economies in which underlying inflation is projected to moderate or remain subdued. The issues facing policymakers will vary across countries, with the downside impact on demand and labour markets from higher uncertainty and weaker exports likely to be the key influence on policy decisions in most countries, but upside inflationary pressures being a more pertinent concern in countries raising tariffs.

• Faced with mounting risks to financial stability, and the increasing linkages between banks and many less regulated non-bank financial intermediaries (NBFIs), effective monitoring and supervision of banks, and progressing with robust regulatory policies for NBFIs and crypto-assets in line with internationally agreed recommendations by the G20 and the Financial Stability Board are key steps to safeguard stability.

• Governments need to ensure longer-term debt sustainability and maintain the ability to react to future shocks, with monetary policy normalisation and growth close to trend providing an opportune moment to act in many economies. Stronger efforts to contain and reallocate spending, improve public sector efficiency and enhance revenues, set within credible medium‑term country‑specific adjustment paths, will be essential for debt burdens to remain manageable and to conserve the resources required to address longer term spending challenges. Spending and tax choices should focus on the need to strengthen sustainable economic growth while preserving adequate support for those in need.

• Rising protectionism, geopolitical uncertainty and weak growth prospects reinforce the need for ambitious structural policy reforms that strengthen living standards, enhance resilience and help to improve prospects for debt sustainability. One area of focus should be regulatory reforms, particularly those that improve the incentives and ability for businesses to innovate and grow and the capacity for workers to move to those parts of the economy where their skills are most needed. Through enabling better resource reallocation, such improvements increase the adaptability of economies to future unexpected shocks and strengthen future productivity growth. Reforms to financial sector regulation can also support more efficient capital allocation and help buttress economies against systemic risks.

Table ‎1.1. Global GDP growth is projected to moderate next year and recover only slowly

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Recent Developments

Global growth has been surprisingly robust

The global economy has shown surprising resilience in 2025 (Figure 1.1, Panel A). Front-loading of goods production and trade ahead of the introduction of higher tariff rates was a key factor in the early part of the year. Easier global financial conditions, supportive macroeconomic policies, real income growth, and strong demand for new AI-related investments in some countries, particularly the United States, are all providing broader support for demand, offsetting headwinds stemming from the gradual implementation of new trade policy barriers, still‑elevated policy uncertainty, and declining residential investment.

Growth developments in advanced economies have been mixed. In the United States, private consumption growth has slowed compared with 2024, partly reflecting the imposition of higher tariff rates on imports and lower net immigration. The government shutdown in the fourth quarter has also resulted in some temporary weakness that should be reversed at least partially in the first quarter of 2026. However, very strong investment in information processing equipment and software has boosted growth (Box 1.1), and buoyant equity markets have generated favourable wealth effects for higher-income households. Private investment has also helped sustain output growth in Japan, even as relatively high inflation has weakened real household income gains, though residential investment fell in the third quarter of 2025. In contrast, in the euro area, business investment growth has generally been sluggish, though disinflation, rising real incomes and fiscal easing supported activity through the first three quarters of the year. Accommodative fiscal policy, along with a decline in domestic policy uncertainty, has also underpinned stronger growth in Korea. In the United Kingdom, output gains have progressively slowed, with some activity pulled forward to the early months of the year in anticipation of tax increases and higher US tariff rates.

GDP growth has been surprisingly resilient in many emerging‑market economies. Chinese production and demand were boosted by strong front-loading activity early in 2025, and the government trade‑in programme for household durables, although the ongoing correction in the property market continues. Easier financial conditions, following reductions in policy interest rates, have helped to underpin domestic demand growth in several other emerging‑market economies, including Colombia, India, Indonesia and Peru. Monetary policy easing also supported the Mexican economy through the first half of the year, though GDP and industrial production contracted in the third quarter amid high external and domestic policy uncertainty. In South Africa, monetary policy easing combined with pension reforms that eased access to retirement funds has boosted private consumption spending. In contrast, growth in Brazil has slowed as earlier monetary policy tightening has moderated domestic demand growth and agricultural production has returned to more normal levels following a spike in the first quarter of the year.

Figure ‎1.1. Global growth has remained resilient

Note: In Panel A, the global, OECD and non-OECD aggregates are derived using moving PPP weights. For Panel B, values below (above) 50 indicate that a balance of firms report a contraction (expansion).

Source: OECD Economic Outlook 118 database; S&P Global; and OECD calculations.

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Global trade volumes (goods plus services) have also been surprisingly robust this year. Front‑loading of exports in the first quarter ahead of anticipated US tariff increases was stronger than anticipated, with global trade volumes rising at an annualised pace of 8.1%. In the second quarter, import volumes in the United States fell at an annualised rate of 29.3% as a result. However, the impact on aggregate global trade growth was partly offset by strong trade in India and continued buoyant trade growth in the smaller emerging Asian economies (Figure 1.2, Panels A and B).

Sustained growth in emerging Asian trade partly reflected rapid growth in Chinese import volumes, which rose at an annualised pace of 9.8% in the second quarter even as exports to the United States fell. The OECD Trade in Value Added dataset highlights the importance of final demand in China for exports in the South‑East Asian economies (Figure 1.3, Panel A). Trade in many Asian economies is also being supported by a strong rise in AI‑enabling trade, linked to the rapid growth in ICT equipment investment in the United States and some other economies (Box 1.1). Tech exports from Korea and Chinese Taipei continued to rise into the third quarter (Figure 1.3, Panel B). Estimates suggest that AI-related trade makes up about 15.5% of total world merchandise trade, with two-thirds of that originating in Asia, 3% in Europe and 2.5% in North America (WTO, 2025a).

Figure ‎1.2. Trade growth has been resilient

Note: The data correspond to quarterly trade of goods and services in volume (average of exports and imports). In Panel A, “Advanced economies” include OECD member countries other than Chile, Colombia, Costa Rica, Mexico, and Türkiye. “Other emerging Asia” includes Hong Kong (China), Indonesia, Malaysia, the Philippines, Singapore, Chinese Taipei, Thailand and Viet Nam. “Other emerging market economies” are all remaining emerging-market economies. In Panel B annual growth rates are shown for 2022-2024. “North America” includes Canada, Mexico and the United States. “Other AEs” in Panel B are the 33 advanced economies who are OECD members excluding “North America”, Ireland and Switzerland. “Other EM Asia” corresponds to “Other emerging Asia” in Panel A. “Other EMEs” are the remaining emerging‑market economies not shown separately.

Source: OECD Economic Outlook 118 database; and OECD calculations.

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Figure ‎1.3. Strong tech-related demand is supporting trade, particularly in Asia

Note: Panel A is based on 2022 data. The green bar shows that almost 20% of OECD domestic value added of the manufacturing industry was consumed as a final good by the United States; the red bar shows that around 13% of G20 EME domestic value added of the information industry was consumed as a final good by China. South-East Asian economies include Hong Kong (China), Malaysia, the Philippines, Singapore, Chinese Taipei, Thailand and Viet Nam. The G20 emerging-market economies include Argentina, Brazil, India, Indonesia, Saudi Arabia and South Africa. Manufacturing includes all ISIC codes 10 to 33; business services from 45 to 82; and the information industry shows ISIC codes 25 and 58 to 63. Panel B is based on values of exports. The Chinese Taipei tech indicator includes integrated circuits; dynamic random access memory integrated circuits; bare printed circuit boards; computer storage devices; and computer parts and accessories; the Korean tech exports indicator is based on semiconductors.

Source: OECD Trade in Value Added (TiVA) 2025 edition; Korean Ministry of Trade, Industry and Resources; Chinese Taipei Ministry of Finance; and OECD calculations.

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Box ‎1.1. Recent developments in ICT investment

Private investment in the information and communication technology (ICT) sector strengthened in the first half of 2025. Across those economies with comparable quarterly data, private investment in ICT equipment as a share of GDP has recently risen in many economies, most notably in the United States (Figure1.4, Panel A). The strong growth in real ICT equipment investment in the United States is particularly notable given the high level of such investment, which is equivalent to around twenty times that in the United Kingdom or Canada. ICT equipment and software investment contributed strongly to real GDP growth in the United States in the first half of 2025 (Figure 1.4, Panel B), though imports of ICT equipment also grew rapidly, suggesting a more modest net impact on domestic output growth.

Other technology-related investment has also been rising rapidly. In the United States, real investment in the construction of data centres increased by an annualised rate of 21% in the first half of 2025, accounting for over 5% of total investment in non-residential construction (see Figure 1.25 below). The United States was already the location for 43% of global installed data centre capacity in 2024, with 25% in China and 16% in Europe (IEA, 2025a). The recent strength in data centre investment in the United States is likely to partially reflect the increased deployment of AI technologies.

Rapid ICT investment has been accompanied by strong growth in tech sector industrial production in some economies. This has been particularly evident in the United States and several Asian economies that have significant ICT production sectors, such as Korea, Singapore, Japan and Chinese Taipei (shown collectively in Figure 1.5, Panel A). In China, value added growth in the sector has also been strong, at 9.3% over the year to October 2025. In contrast, in the European Union, growth in the production of computer and electronic products has remained relatively subdued.

Figure ‎1.4. Strong ICT investment has supported economic growth

Note: In Panel A ‘Latest’ corresponds to 2025Q3 for Israel, the Netherlands and the United Kingdom, and to 2025Q2 for other countries. In Panel B, ICT equipment and software investment is defined as gross private domestic investment in information processing equipment and software. ICT equipment imports are defined as imports of computers, peripherals and parts.

Source: OECD Quarterly GFCF by Assets database; Bureau of Economic Analysis and OECD calculations.

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Strong growth in tech sector activity has underpinned global trade flows in the first half of the year. In particular, trade in goods that the World Trade Organisation defines as “AI-enabling” contributed over half the growth in trade for selected G20 and Asian economies in the second quarter of 2025, a substantial increase from the annual average contribution during the 2017-24 period (Figure 1.5, Panel B).

Figure ‎1.5. Global industrial production and trade are being supported by activity in the ICT sector

Note: Panel A is based on seasonally adjusted data in real terms. “Asia” is the weighted average of industrial production for Japan, Korea, Singapore and Chinese Taipei. The selected high-technology industries are: computer and electronic production for Asia, computer, electronic and optical products and electrical equipment for the EU (NACE Rev 2 C26), computers and peripheral equipment, communications equipment and semiconductors and related electronic components for the United States (NAICS 3341, 3342 and 3344), computer, communication & other electronic equipment for China. Panel B is based on monthly merchandise trade statistics in nominal USD terms. Trade values are computed as the average of exports and imports. The selected countries are G20 and South-East Asian economies for which timely customs data are available (Argentina, Australia, Brazil, Canada, China, European Union, United Kingdom, India, Japan, Mexico, Türkiye, the United States, South Africa, Hong Kong (China), Malaysia and the Philippines). These countries account for around two-thirds of global merchandise trade in 2024. AI-enabling goods are the 104 products at HS6 level defined by the WTO (2025b).

Source: OECD Main Economic Indicators database; Eurostat; General Administration of Customs China; Ministry of Economic Affairs Chinese Taipei; National Bureau of Statistics of China; Statistics Korea; Statistics Singapore; Ministry of Economy Trade and Industry of Japan; UN Comtrade; US Federal Reserve; and OECD calculations.

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Recent activity indicators are mixed

Recent business survey indicators suggest that output growth continued to hold up in most economies through to October (Figure 1.1, Panel B), with preliminary estimates suggesting this was maintained in advanced economies in November, but there are some signs of slowing momentum in other monthly activity data. As front-loading of consumption and investment spending has unwound, industrial production growth has moderated in some major economies, including Germany and Japan. Yet, the slowdown in industrial production growth has not been universal, with activity continuing to expand steadily in China and the United States. Despite elevated policy uncertainty, textual analysis of transcripts from earnings calls held during October and November by the top 50 listed companies in the United States do not indicate a slowdown in investment intentions. Consumer sentiment does seem to be impacted though, with confidence remaining subdued by historical standards and below the level observed in late 2024, especially in OECD economies (Figure 1.6, Panel A). This may also reflect recent rapid increases in food prices in some economies. A composite indicator of monthly economy‑wide economic activity across 14 advanced and emerging-market economies suggests softer output growth in these economies in the third quarter of 2025 (Figure 1.6, Panel B).

Changes in US bilateral tariff rates between mid-May and mid-November have lowered the (ex‑ante) effective tariff rate on US merchandise imports to an estimated 14.0% in the latter half of November from the 15.4% rate assumed in the June OECD Economic Outlook. The revision reflects the net effects of a lower tariff on imports of goods from China, new higher tariffs imposed at the country level since August, some higher sector tariffs, and an upward reassessment of the proportion of imports from Canada and Mexico that are compliant with the US‑Canada-Mexico Free Trade Agreement (Box 1.2). Import tariffs on secondary copper products were raised by 50 percentage points, steel and aluminium tariffs were raised from 25 percentage points to 50 percentage points, and new tariffs were imposed on timber, trucks and buses. Offsetting these changes, the United States has lowered the general tariff increase imposed this year on all goods imports from China to 10% from 20%, and has signed trade agreements with Japan and the European Union, which include lower tariff rates for cars and parts, and civil aircraft exports to the United States, and a guaranteed tariff ceiling on pharmaceutical product exports. Trade agreements have also been signed with Switzerland, Korea and several emerging-market economies, including Argentina, Indonesia, Malaysia, Thailand, and Viet Nam.1 The range of exempted agricultural products has also been expanded. The revised assessment of the proportion of USMCA-compliant merchandise imports from Canada and Mexico reduces the aggregate effective tariff rate by just over 3 percentage points given the share of these countries in US trade.

Figure ‎1.6. Consumer sentiment remains subdued and some indicators of economic activity have slowed

Note: In Panel A, the global, OECD and non-OECD aggregates are derived using moving PPP weights. Panel B is based on monthly activity (largely output) data from 14 countries (Argentina, Brazil, Canada, Chile, Colombia, Costa Rica, Finland, Japan, Korea, Mexico, Norway, Peru, Sweden and the United Kingdom) up to 28 November 2025, weighted using moving nominal GDP shares in PPP terms. Bars show the annualised percentage change of the indicator average over the 3 months ending in the month depicted relative to the previous 3 months.

Source: OECD Main Economic Indicators database; LSEG; and OECD calculations.

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The impacts of higher tariff rates are yet to be fully felt in the US economy. This reflects a combination of factors, with firms making use of inventories and ample profit margins to avoid or absorb the initial impact of higher tariffs, lags between the announcement and imposition of higher tariff rates, and the exemption of goods already in transit from higher tariff rates. Observed (ex-post) monthly tariff rates calculated from United States revenue and trade statistics (reported customs duties divided by the value of merchandise imports) have risen sharply this year, but are lower than estimated effective tariff rates (Figure 1.7, Panel A), portending an increase in tariff collection in the coming months.2 The extent of the gap between revenues and estimated effective tariffs differs across types of goods. Tariff collection rates on cars and parts as well as steel and aluminium, which have been in place for some time and have few global exceptions, are closer to their effective tariff rates than is the case for other goods.

Figure ‎1.7. The impact of US tariffs is increasingly being felt

Note: In Panel A, the monthly average 2025 estimated effective tariff rate is based on applicable rates to products and countries at the time they became effective, weighted by country-specific product shares of United States imports in 2024. The estimates include updated weights for compliance of imports from Canada and Mexico (see Box 1.2 for more details). Data before 2025 based on WITS average effective tariff rates, corrected for Section 301 actions on China undertaken between 2018 and 2024. 2025 tariff revenues estimated as a share of import values including cost, insurance and freight, based on monthly data from US Census Bureau. Data before this are from USITC (2025) "U.S. imports for consumption, duties collected, and ratio of duties to value, 1891‑2024". Data in Panel B are based on import values. Goods which face no new tariffs in 2025 are all goods exempted from country-specific tariff increases as of August 2025, excluding goods imports in these categories from China (since the additional 20 percentage point tariff increase imposed on China in March 2025 is unaffected by the exemption).

Source: OECD Economic Outlook 118 database; US Census Bureau; United States International Trade Commission; World Integrated Trade Solution (WITS); and OECD calculations.

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Despite the lagged effects of higher tariffs, there is a sharp decrease in the value of US imported goods subject to tariffs compared to non-tariffed goods (Figure 1.7, Panel B). This suggests that tariffs are affecting demand, and will continue to weigh on trade volumes as announced tariffs come into full effect. This could in turn further weigh on the estimated effective tariff rate, reducing the divergence with collected duties. Continued strength in demand for technology products should still provide some support for global trade, although new export orders for manufacturing in most large economies remain relatively weak outside of the Asian emerging-market economies. Trade policy uncertainty has fallen from recent peaks, but recent announcements about further changes to bilateral tariff barriers and the possible broadening of licencing requirements for rare earth materials in China could add to uncertainty.

Box ‎1.2. US tariff rates: in law and in effect

In recent months the United States has continued to announce additional tariff increases on imports from most countries, alongside separate sector-specific tariffs on steel and aluminium, cars and parts, trucks, buses, timber, and copper. This box discusses some of the issues involved in calculating the aggregate effective tariff rate for each country, focusing in detail on Canada and Mexico – two major trading partners with the United States.

The overall impact of tariffs is expected to vary widely by country, reflecting the differing composition of imports from each country as well as the different tariff rates applied to countries (see Figure 1.8).

• The estimated effective tariff rate on Chinese goods entering the United States has fallen by close to 10 percentage points, in line with the decision to reduce the tariff rate applied to all Chinese goods from 20% to 10%.

• For the European Union, Japan and Korea, new trade agreements with the United States impose a maximum rate of 15% on most goods – including cars and parts, and timber, as well as a promise of a maximum 15 percentage point tariff increase on pharmaceutical and semiconductor products should the United States impose global sector tariffs on these goods. The global rate continues to be applied for steel and aluminium, copper, trucks and buses. These countries also qualify for an expanded list of zero-rated items.1

• As a result of these agreements, the effective tariff rates on imports from Germany, Hungary, Japan, Poland and the Slovak Republic are now estimated to have declined since mid-May, in part due to the lower autos tariffs they now face that make up a substantial share of their exports to the United States (Figure 1.8).

• The effective tariff rate on imports from Australia has also declined since May, as a larger share of items are now exempt from tariffs.

• By contrast, amongst EU member states, Luxembourg, Bulgaria and Greece face higher tariffs than before as they have a relatively low share of zero-rated exports to the United States and higher shares of steel and aluminium exports. However, their merchandise exports to the United States are relatively small shares of their total goods and services exports.

• Brazil and India now face additional tariffs of 40 percentage points and 25 percentage points respectively on a range of goods. Taking into account specific exclusions, including those announced in November, these tariffs are estimated to affect about 50% of Brazil’s exports to the US and 57% of India’s exports.

• The effective tariffs on imports from Switzerland is expected to decline by almost 10 percentage points by next year from the estimate in Figure 1.8, once negotiations are completed. The effective tariff applied to Malaysia’s exports to the United States could fall a further 4.5 percentage points from the estimate in Figure 1.8 once the new bilateral agreement is ratified and applied. Together, these two changes could lower the aggregate US effective tariff to 13.8%.

There are also significant declines in the estimated effective tariff rates for Canada and Mexico. A particular complication for these two countries is the need to estimate the share of different US imports that are compliant with the United States-Mexico-Canada Agreement (USMCA). Such imports enter the United States on a tariff-free basis provided that certain conditions are met. As of 1 August, imports from Canada face a tariff of 35% on most goods (and 10% on energy and potash goods) which are not compliant with the USMCA. Mexico faces a 25% tariff on non-USMCA compliant goods.

There is evidence suggesting that USMCA compliance rates have risen since tariffs were raised this year, as the additional costs of the reporting procedures required to ensure compliance are now lower than the cost of the tariff applied to non-compliant goods. Previously, US duty rates of close to zero provided little incentive for many businesses to undertake the costs of compliance. In 2024, around 50% of US imports from Mexico and 40% from Canada were registered under the USMCA programme. This informed the assumption of a 50% compliance rate with USMCA in the effective tariff rate estimates reported in the June 2025 OECD Economic Outlook. Since then, the share of goods registered under the USMCA programme has risen, reaching 85% in July for both Canada and Mexico (Figure 1.9, Panel A). Moreover, the shares of duty-free goods in the total value of imports to the United States have remained broadly stable for Canada and Mexico, whereas they have fallen elsewhere (Figure 1.9, Panel B). The updated effective estimates for Canada and Mexico now assume that 80% of goods imported into the United States will be USMCA‑compliant.

Figure ‎1.8. Estimated US effective tariff rates

Note: Estimates based on trade policy announcements as of 14 November 2025 and calculated using weights based on product level data for US imports by country in 2024. These take account of country-specific tariff rates and sector-specific changes due to a 25% tariff rise for listed cars, parts, trucks and buses; a 50% tariff rise on steel, aluminium and copper products; and zero-rated general goods as well as those related to semiconductors. Europe, Japan and Korea face a maximum 15% tariff on cars and parts, and timber, and 0% tariffs are applied to civil aviation products, generic pharmaceuticals and certain natural resources). The United Kingdom faces a 25% tariff rise on steel and aluminium, 7.5% for British cars within the annual quota, 10% on timber products, and duty-free civil aviation products. China, Brazil and India face additional country-specific tariffs, with varying application across products. Data classifications are based on product-level lists published by the US administration.

Source: United States International Trade Commission; US Census Bureau, and OECD calculations.

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The share of duty-free imports is generally higher for imports from Canada and Mexico than elsewhere across a range of goods (Figure 1.10, Panel A). Taking the share of duty-free goods as a proxy for USMCA compliance, around 60% and 53% of car imports for Mexico and Canada respectively are USMCA compliant. For steel and aluminium, however, Canada has a compliance rate of just 33% compared to 66% for Mexico. For goods excluding imports of cars and parts, steel and aluminium, and items exempted from tariffs, compliance rates are 93% and 90% for Canada and Mexico, respectively.

Overall, these compliance rates result in US imports of cars and parts from Canada and Mexico currently incurring duties of 12% and 11% respectively, slightly less than half the 27% being charged on imports from many other countries (Figure 1.10, Panel B). For steel and aluminium, Mexican imports incur duties of 15% of import values, whilst those from Canada incur duties of 32%, close to the 33% incurred by imports from the rest of the world (Figure 1.10, Panel C). These rates will rise as the 50 percentage point tariff on steel and aluminium has been effective since late August 2025.

As a result of these changes in compliance across sectors, the estimated increase in the aggregate US effective tariff rate on imports from Canada and Mexico has declined. Currently, these are estimated to be 4.8% and 5.4% respectively, down from 12.5% and 14.8% based on developments up to mid-May. Incorporating these two changes, the estimated aggregate effective US tariff rate is approximately 3 percentage points lower than it otherwise would be, reflecting the importance of US trade with Canada and Mexico.

Figure ‎1.9. USMCA compliance has limited effective tariff rates increases on US imports from Canada and Mexico

Note: Share of duty-free imports based on dutiable value as a share of CIF import values.

Source: United States International Trade Commission; US Census Bureau; and OECD calculations.

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Figure ‎1.10. Different shares of duty-free trade with the United States result in wide variation in effective sectoral tariff rates

Note: Panel A “General zero-rated goods” refers to goods exempted from 2025 tariff increases in Executive Order 14257 other than items listed in the semi-conductors list. Duty-free goods are applied under USMCA and other provisions, and calculated as the share of non-dutiable value relative to import values including cost, insurance and freight. “Other goods” exclude the listed sectors, as well as items listed in the semi-conductors list, which have a share of duty-free exports above 95%.

Source: United States International Trade Commission; US Census Bureau; and OECD calculations.

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1. These trade agreements also included a number of other commitments, relating to investment and regulation.

There are signs that labour markets have weakened

Labour demand has shown further signs of moderating this year. Job openings per unemployed worker have generally continued to decline and are now below the average level in 2019 in many major economies, including the United States, United Kingdom, Germany, Canada and Japan (Figure 1.11, Panel A). At an industry level, measures of job openings in administrative and support services, which includes temporary employment services, have fallen particularly notably across countries. The unemployment rate in the median OECD economy has drifted higher, from 5.2% in the first half of 2024 to 5.5% in the third quarter of 2025, owing to developments in the population aged 25-54 (Figure 1.11, Panel B). However, this has partly reflected increased labour force participation rates. Rising participation rates have been observed across all major age cohorts in many European economies, including Czechia, Denmark, France, Latvia, the Netherlands, Ireland, Spain and the United Kingdom.

Figure ‎1.11. Labour demand has slowed and unemployment rates have generally drifted higher

Note: In Panel A, the indicator is computed as the number of job vacancies to unemployed workers except for Japan where it represents the ratio of active job openings to active applicants. The median in Panel B is calculated across 36 OECD countries.

Source: OECD Infra-annual Registered Unemployment and Job Vacancies database; OECD Infra-annual Labour Statistics database; Eurostat; CEIC; Statistics of Japan; and OECD calculations.

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Nominal wage growth in most OECD economies has continued to slow, although strong minimum wage increases or wage indexation mechanisms based on past inflation have contributed to rapid wage gains in some economies, including Austria, Hungary, Greece, Bulgaria, Croatia and Colombia. Persistent inflation has also kept negotiated wage growth high in Japan. Largely reflecting patterns in nominal wage gains, unit labour cost growth has generally been declining but remains high relative to medium‑term inflation objectives in many countries (Figure 1.12, Panel A). Real wages have continued to grow steadily where solid nominal wage growth has combined with ongoing disinflation, such as in many euro area economies. However, more persistent inflationary pressures have caused real wages to plateau elsewhere, including in Canada and Japan (Figure 1.12, Panel B).

Figure ‎1.12. Labour cost growth remains elevated and real wages have risen in most economies

Note: Panel B shows the compensation rate of employees deflated by the private consumption deflator except for Brazil, where it corresponds to real labour income (usual earnings). The latest historical point corresponds to 2025Q3 for Brazil, Japan, Spain and the United Kingdom, and 2025Q2 for remaining countries except Israel (2025Q1).

Source: OECD Economic Outlook 118 database; CEIC; and OECD calculations.

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Inflation developments have recently diverged

Inflation developments continue to vary greatly between countries. The four largest euro area economies now have consumer price inflation around or below the area-wide 2% target. Inflation is also under 2% and below medium-term policy objectives in some emerging-market economies, including Costa Rica, India, Malaysia, Peru, the Philippines and Thailand. In China, consumer price inflation turned slightly positive in October, despite declining producer prices. Yet, disinflation progress has stalled in some other major economies, with inflation having levelled off above central bank targets. An increasing share of countries have inflation above target (or above the top of the target band) compared with late 2024 (Figure 1.13, Panels A and B). Headline inflation is still above central bank targets in the United Kingdom, United States and Japan, as well as in some emerging‑market economies such as Brazil and Colombia. Despite having declined markedly, inflation remains at double‑digit rates in Türkiye and Argentina.

Goods inflation has picked up and services inflation remains sticky in many economies. In the median OECD economy, annual goods inflation rose from 0.8% in the final quarter of 2024 to 1.8% in October 2025, while median services inflation edged up from 3.6% to 3.7% over the same period (Figure 1.13, Panel C). An increase in food inflation has been one factor pushing goods inflation higher. In the United States, tariff-rate increases have also contributed, with the share of consumer goods with prices rising by above 2% turning up since May 2025 (Figure 1.13, Panel D). Other policy changes have also temporarily pushed inflation higher in some countries, including the United Kingdom, with recent increases in administered prices and payroll taxes, and Indonesia, following the phase‑out of a temporary electricity price discount. In services sectors, inflation in recreation and restaurant items remains elevated in many economies. However, weakening housing cost pressures are now helping to reduce inflation.

Figure ‎1.13. Disinflation has levelled off in some economies partly due to higher goods inflation

Note: Panel B covers headline consumer price inflation in 22 OECD economies (the euro area is included but not individual euro area member countries) and 28 non-OECD countries. For central banks targeting a range (a point target), ’Below target’ refers to cases where headline inflation is below the lower threshold of the range (below the point target by more than 0.5pp); ‘At target’ is where headline inflation is within the target range (within 0.5pp of the point target); ‘Above target by up to 1pp’ where headline inflation is above the upper threshold of the range by less than 1pp (above the point target by between 0.5pp and 1.5pp); ‘Above target by greater than 1pp’ where headline inflation is above the upper range by more than 1pp (above the point target by more than 1.5pp). The last data point is based on September 2025 inflation for all countries other than the United States (August 2025).

Source: OECD Economic Outlook 118 database; OECD Consumer Prices database; Bureau of Economic Analysis; Eurostat; and OECD calculations.

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Underlying inflation developments have also diverged. A harmonised measure of monthly trimmed mean inflation has declined in France, India and Türkiye relative to a year earlier. However, trimmed mean inflation increased in some other major economies, including the United Kingdom, Spain, Japan and Canada (Figure 1.14, Panel A). Furthermore, short-term household inflation expectations have materially risen since the start of the year in Greece, the United States, Canada and Ireland (Figure 1.14, Panel B). Medium and longer‑term household inflation expectations remain stable but above central bank targets in those economies with available data such as the United Kingdom, United States and euro area.

Figure ‎1.14. Underlying inflation and short-term inflation expectations have risen in some economies

Note: In Panel A, the latest data are for October 2025, except for the United States (August 2025). Trimmed mean inflation is the recomputed overall inflation rate after removing 10% of the consumer basket at the top and at the bottom of the distribution of inflation rates so that the most extreme price changes are excluded. In Panel B, the most recent monthly data are for November for Korea, New Zealand, the United Kingdom and the United States, October 2025 for Mexico, and September 2025 for other countries, except Australia and Canada (third quarter of 2025).

Source: Banco de Mexico; Bank of Canada; Bank of Japan; Bank of Korea; Bureau of Economic Analysis; European Central Bank; Eurostat; Federal Reserve Bank of Atlanta; Korean Statistical Information Service; Ministry of Statistics and Program Implementation; Office of National Statistics; Reserve Bank of Australia; Statistics of Japan; Turkish Statistical Institute; University of Michigan; YouGov/Citigroup; and OECD calculations.

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Financial market conditions have improved

Financial conditions have eased considerably since April in both advanced and emerging‑market economies, with financial market volatility and stress indicators generally remaining low, strong equity returns, compressed credit spreads and the depreciation of the US dollar against most currencies this year. However, sovereign yield curves have steepened considerably at the long end, suggesting growing concerns about fiscal risks. Soaring gold prices and large-scale hedging of US dollar-denominated exposures also point to continued uncertainty.

Equity markets have risen strongly, particularly in the United States, where price-earnings valuations are approaching levels last seen in the late 1990s at the peak of the dot-com bubble (Figure 1.15, Panel A). Equity risk premia have also continued to decline, reaching levels last observed in 2005–06 prior to the global financial crisis, highlighting strong risk appetite. Despite some sell-offs in recent weeks, technology stocks remain the main driver of the surge in equity prices, reflecting investor enthusiasm for the potential gains from AI and stronger expected earnings growth than in other sectors and jurisdictions (Figure 1.15, Panel B). After soaring for most of this year, the market value of crypto‑assets has declined sharply, by around 30% from the peak reached in early October. In the United States domestically focused US companies, often reliant on imported inputs, face higher costs and have continued to see more limited gains than other companies (Roulet and Tatomir, 2025). Japanese equities have also performed strongly, supported by robust earnings prospects, but equity prices have risen more slowly in Europe, reflecting softer expected earnings growth. Equity performance has remained weaker for firms heavily exposed to US tariffs in these jurisdictions.

Figure ‎1.15. Elevated equity valuations are supported by the higher expected earnings of technology companies

Note: Panel A shows monthly values of the cyclically adjusted price-to-earnings ratio (CAPE), computed with 10-year average earnings adjusted for subsequent changes in consumer prices. The value for November 2025 is based on observations up to 19 November.

Source: LSEG; and OECD calculations.

Spreads on high-yield corporate bonds remain close to historical lows, despite a recent uptick, and investment-grade bond yields have declined in recent months. Low credit risk premia and sustained portfolio inflows in the United States and the euro area have helped to support strong corporate bond and leveraged loan issuance during the first three quarters of 2025 (Figure 1.16, Panel A). Bank credit growth has also been recovering gradually in major advanced economies, albeit from low levels, supported by an ongoing decline in lending rates (Figure 1.16, Panel B).

Emerging-market economies have benefitted from higher global risk appetite. A weaker US dollar and declining exchange rate volatility have made emerging-market assets relatively more attractive. This has been accompanied by strong growth in equity prices, partly driven by a substantial rise of AI‑related equities, with the main exception of India, where the stock market has been broadly flat, possibly reflecting the marked rise in the US tariff rate on imports of goods from India. Spreads on corporate bonds issued by emerging-market companies have continued to fall, reaching their lowest levels since 2007. In the sovereign bond markets of most emerging-market economies, long-term yields have broadly eased since June and spreads on US dollar-denominated bonds have declined.

In contrast, developments in sovereign debt markets in advanced economies have been less favourable. Ten-year yields have edged up in recent months in many jurisdictions and 30‑year yields have increased by larger amounts, steepening the long end of the yield curve. Amid ongoing quantitative tightening and large net government debt issuance needs in the near future, that steepening could reflect growing concerns about long-run fiscal sustainability. In the United States, the 10‑year sovereign yield has been underpinned by a persistently high estimated real term premium. In France, mounting political challenges have clouded the fiscal outlook, markedly widening French‑German sovereign spreads since mid-August.

Figure ‎1.16. Sustained debt issuance and declining bank lending rates

Note: Panel A shows the sum of global high-yield corporate bond and leveraged loan issuance, deflated using the US consumer price index rebased to 2025Q3. A leveraged loan is a secured loan granted to a highly indebted (leveraged) company. Leveraged loans are defined as secured loans where the borrower is sub-investment-grade or the spread at issuance is above a certain threshold. Panel B shows median rates for selected advanced economies (Australia, Canada, France, Germany, Italy, Japan, Spain, Sweden, Switzerland, the United Kingdom and the United States). In the computation of median deposit rates, offer rates are used for Canada, Switzerland and the United States, and deposits of all sectors (without distinguishing between firms and households) are used for Japan and the United States. Average contract interest rates on loans and discounts are used for Japan in the computation of median lending rates (without distinguishing between firms and households).

Source: Bank of Canada; Bank of England; Bank of Japan; Board of Governors of the Federal Reserve System; European Central Bank; Federal Deposit Insurance Corporation; Mortgage Bankers Association; Reserve Bank of Australia; Sveriges Riksbank; Statistics Sweden; Swiss National Bank; and OECD calculations.

Stretched asset valuations and high economic uncertainty have led investors to increase their demand for gold and pursue hedging strategies to a greater extent. Gold prices have reached historically high levels, rising by more than 60% since January at their peak — the strongest performance since the 1979 oil price shock. The depreciation of the US dollar this year, only partially reversed since October, has been sustained by expectations of policy rate reductions, mounting fiscal concerns and foreign investors’ hedging activities to mitigate potential losses on unhedged USD denominated exposures. The latter has been reflected in a notable decline in net long dollar positions in forward markets since April.

Projections

Global GDP growth is projected to slow from 3.2% in 2025 to 2.9% in 2026, before picking up to 3.1% in 2027 (Figure 1.17, Panel A; Table 1). Growth is expected to soften during the second half of this year, as front-loading activity further unwinds and higher effective tariff rates on imports to the United States and China pass‑through further into business costs and final goods prices, dampening investment and trade growth. Elevated geopolitical and policy uncertainty will also continue to weigh on domestic demand in many economies. However, global growth is expected to recover through 2026, helped by the fading impact of higher tariff rates, favourable financial conditions, supportive macroeconomic policies and lower inflation, with emerging-market economies in Asia continuing to account for the majority of global growth (Figure 1.17, Panel B). The projections are based on a technical assumption that the bilateral tariff rates announced by mid-November persist through the rest of the projection period, despite ongoing legal challenges in the United States.3

Figure ‎1.17. Global growth is projected to weaken before recovering gradually

Note: In Panel A, ‘Advanced economies’ include the OECD member countries except Chile, Colombia, Costa Rica, Mexico, and Türkiye, plus Croatia. ‘Emerging-market economies’ comprises all other economies. In Panel B, Emerging Asia comprises China, Hong Kong (China), India, Indonesia, Malaysia, the Philippines, Singapore, Chinese Taipei, Thailand and Viet Nam. Latin America comprises Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico and Peru. Contributions calculated using moving PPP shares of global GDP.

Source: OECD Economic Outlook 118 database; OECD Economic Outlook 117 database; OECD Interim Economic Outlook 118 database; and OECD calculations.

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The near-term growth projections are close to those in the September 2025 OECD Interim Economic Outlook but stronger than those in the June 2025 OECD Economic Outlook (Figure 1.17, Panel C). The change since June reflects several factors, including easier global financial conditions, evidence of stronger investment momentum in some OECD economies and more supportive macroeconomic policies than anticipated, with policy interest rates continuing to be lowered in many countries, and little fiscal tightening in the median OECD economy this year and next. Fiscal policies are also providing support for domestic demand in China, India (via the goods and services tax reform) and Indonesia. At the same time, inflation projections for G20 countries have been revised downwards to incorporate weaker‑than‑expected inflation outturns, most notably for the United States. Inflation in the G20 countries is anticipated to further moderate through 2026, with the inflationary impact from higher trade costs generally offset by softer growth (Figure 1.17, Panel D).

Central banks are assumed to lower monetary policy rates further as inflation continues to fall and labour market pressures ease. In most economies, real interest rates are assumed to decline to be around estimates of neutral levels by the end of 2026. Limited further monetary policy easing is assumed for 2027, with the exception being those economies where policy rates at the end of 2026 remain relatively restrictive, such as Brazil, Colombia and Türkiye. After a neutral stance in 2025 and 2026, fiscal policy is assumed to tighten modestly in most OECD economies in 2027, with relatively sizeable consolidation assumed in the United Kingdom, France, Italy and several smaller European economies. Fiscal policy is assumed to be mildly restrictive in the majority of emerging-market economies in 2026-27, but little changed in some of the largest economies, including China, India and Indonesia.

The prospects for individual major economies and regions are as follows:

• In the United States, output growth is expected to slow as the effects of substantially higher effective tariff rates on imports, cuts to the federal government workforce and a drop in net immigration are fully felt. As their peak impact passes, and with ongoing strength in AI-related investment and continued monetary policy easing, calendar year growth is expected to pick up in 2027. On an annual basis, GDP growth is projected to be 2.0% in 2025, 1.7% in 2026 and 1.9% in 2027. In Canada, real GDP growth is also anticipated to gradually recover as the economy further adjusts to the new trade environment, with growth of 1.1% in 2025, 1.3% in 2026 and 1.7% in 2027.

• The Japanese economy is expected to expand at a moderate pace, helped by expansionary fiscal policy next year, and with private consumption growth supported by real disposable income gains and business investment growth underpinned by healthy profits and government subsidies. Nonetheless, these factors will be somewhat offset by subdued external demand amid new trade restrictions and elevated trade policy uncertainty. Real GDP growth is projected to moderate from 1.3% in 2025 to 0.9% in both 2026 and 2027. In Korea, growth is projected to recover, from 1.0% in 2025 to 2.1% in both 2026 and 2027, supported by monetary policy easing and further modest fiscal expansion.

• Growth in the euro area is projected to ease modestly from 1.3% in 2025 to 1.2% in 2026, before increasing to 1.4% in 2027, with increased trade frictions being offset by improved financial conditions, ongoing capital spending from Recovery and Resilience Facility funds and resilient labour markets. Fiscal expansion is anticipated to boost economic activity in Germany, reflecting higher spending on defence and infrastructure, but expected consolidation in both France and Italy will dampen growth. In the United Kingdom, fiscal consolidation and uncertainty will also weigh on the pace of expansion, with real GDP growth projected to ease from 1.4% in 2025 to 1.2% in 2026 and 1.3% in 2027.

• In China, the unwinding of front-loading of exports, the imposition of higher tariff rates on exports to the United States, continuing adjustment in the real estate sector and the fading of fiscal support is expected to lower growth. While the anti-involution campaign is anticipated to weaken business investment growth in industries affected by excess capacity, the pace of public infrastructure investment is expected to pick-up. Real GDP growth is projected to be 5.0% in 2025 and 4.4% in 2026 and 4.3% in 2027.

• In India, growth is anticipated to be supported by rising real incomes, monetary policy easing and strong growth in public capital spending. However, higher tariff rates on many exports to the United States will weaken export growth, with real GDP projected to grow by 6.7% in the fiscal year 2025‑26, 6.2% in 2026-27 and 6.4% in 2027-28. Similarly, in Indonesia, strong domestic demand growth is expected to be partially offset by a deceleration in export growth. Real GDP is projected to grow by 5.0% in both 2025 and 2026, followed by an uptick to 5.1% in 2027.

• The Mexican economy is projected to recover slowly as inflation eases and further cuts to policy rates take effect. However, higher tariffs on exports to the United States and weak public demand are headwinds to growth, with real GDP projected to rise by 0.7% in 2025, 1.2% in 2026 and 1.7% in 2027. In Brazil, growth is anticipated to weaken in the near-term as investment slows in response to higher interest rates, though monetary policy easing through 2026 will support activity. After easing from 2.4% in 2025 to 1.7% in 2026, output growth is projected to recover to 2.2% in 2027.

Global trade growth for 2025 is now expected to be 4.2%, reflecting stronger than expected front‑loading in the first half of the year. This is being unwound only partially given the momentum of investment‑ and tech‑related trade through 2025. Nonetheless, trade growth is projected to moderate to 2.3% in 2026 as the full effects of higher tariffs are felt, before recovering to 2.8% in 2027 as growth picks up.

The composition of trade growth is different to the pre-pandemic period (Figure 1.18, Panel A), with the emerging-market economies accounting for a larger share, even as all regions grow more slowly. In particular, the share of trade accounted for by the South-East Asian economies is expected to rise in 2026‑27. In contrast, the contribution of China is projected to weaken slightly, as trade growth slows, and the contribution of advanced economies to global trade growth is expected to decline, especially that of Europe and the North American economies.

Figure ‎1.18. Trade patterns are evolving with emerging markets becoming a key driver of growth

Note: North America includes Canada, Mexico and the United States. Europe includes the 22 OECD countries which are members of the European Union, plus Iceland, Norway, Switzerland, Türkiye and the United Kingdom. South-East Asian economies include Hong Kong (China), Malaysia, the Philippines, Singapore, Chinese Taipei, Thailand, and Viet Nam. Other advanced economies include Australia, Israel, Japan, Korea and New Zealand. Statistical discrepancies mean that current account balances based on national data rarely equal zero at the world level.

Source: OECD Economic Outlook 118 database; and OECD calculations.

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Global current account balances are projected to decrease slightly as a share of global GDP over the next two years (Figure 1.18, Panel B). In the United States, lower imports and reduced remittances linked to international migration, and continued strong growth in tech-related exports and services help to reduce the current account deficit from 2024 levels, despite a decline in export market performance. China’s continued export growth, coupled with weak domestic demand and a continued policy orientation towards import substitution is projected to result in a higher external surplus. Sizeable surpluses are also projected to persist in Germany, Japan, Korea and a number of smaller economies, including Denmark, Ireland, the Netherlands, Norway, Sweden, Switzerland and Thailand. There is little change in the current account surplus in the euro area as a whole.

Headline inflation is projected to decline further in the advanced and emerging-market economies in which inflation is currently exceeding the central bank target (Figure 1.19). In the United States, inflation is expected to rise further over the next several quarters as tariff increases further pass through to final goods prices, peaking in mid-2026, before moderating slowly as excess capacity builds and tariff impacts fade. Headline inflation has exceeded 2% in Japan since mid-2022 and is projected to continue to do so over the coming quarters, with underlying inflation increasing partly due to solid nominal wage and unit cost growth. In some emerging-market economies, inflation is projected to pick up from very low levels. The expected reduction in excess capacity in China, with the introduction of anti-involution measures, is anticipated to help consumer price inflation rise from its current very low rate. In other emerging-market economies, such as Costa Rica, India, Indonesia and Thailand, the fading of temporary factors will push inflation higher but consistent with central bank targets. In contrast, inflation is projected to further decline in Argentina and Türkiye, partly reflecting fiscal restraint.

Figure ‎1.19. Inflation is projected to move towards central bank targets

Headline consumer price inflation

Note: Argentina and Türkiye are shown on the right-hand scale, all other countries on the left-hand scale. Data refer to the personal consumption expenditure price index for the United States, harmonised index of consumer prices for the euro area aggregate, euro area member states and the United Kingdom, and national consumer price indices for all other countries. India projections are based on fiscal years, starting in April. OECD is computed as the median of member countries.

Source: OECD Economic Outlook 118 database; and OECD calculations.

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OECD employment growth is expected to weaken from the pace of recent years, with annual growth in the median OECD country projected to ease from 0.9% in 2024 to be 0.6% over 2025‑27. Employment growth is projected to be more robust in some non-OECD economies, such as South Africa, but to continue to slow in China as the ageing population further reduces labour supply. Labour force growth is also generally projected to further ease, with populations ageing and migration inflows moderating in some economies. After increasing from 5.2% in 2024 to 5.7% in 2026, the median unemployment rate across OECD economies is projected to remain stable in 2027. Nominal wage growth is projected to continue to decline in most economies as labour markets further loosen. Coupled with a projected gradual upturn in labour productivity growth, moderating wage pressures will ease unit labour cost growth and, in turn, reduce inflationary pressures.

Risks

Further changes in trade policies could significantly impact growth

Amid ongoing policy uncertainty, two key concerns are that bilateral tariff rates could be raised further on merchandise imports, and the possibility of more widespread restrictions on the export of critical products. Such moves could further raise international tensions and trade policy uncertainty, with implications for a broad set of countries and industries. The associated restructuring of production and supply chains might also result in additional costs that would feed through into prices and dampen growth and lower longer-term economic efficiency.

In October 2025, China announced plans for a significant extension of export controls on lithium ion‑batteries and rare-earth materials and technologies, with licences required even for foreign‑made products that use Chinese-sourced rare earths or rare earth technologies. Although these plans have subsequently been officially suspended until November 2026, their announcement highlights the potential supply chain and trade risks related to trade concentration. Rare earths are used primarily as magnets, catalysts and phosphors in a wide range of products - from hard drives, liquid crystal displays, lasers, semiconductors and superconductors, to electric vehicles and wind turbines (IEA, 2025b).4 They are considered critical, even though they are used in small quantities, as they are difficult to substitute, recycle and produce.5 China accounts for about 60% of rare earths mining and 94% of magnet production (Figure 1.20, Panel A), and around 8% of global exports and 40% of global imports (Figure 1.20, Panel B). Although trade in rare earths was just 0.04% of global merchandise trade values in 2024, the breadth and complexity of China’s proposed controls could materially affect many supply chains in the short to medium term if restrictions are reimposed and licences are delayed or denied. Such adverse supply shocks would also materially impact the costs of products reliant on these inputs. Transport equipment, defence equipment and energy are where restrictions would be likely to have the greater impact (Alfaro et al., 2025; Banin et al., 2025; IEA, 2025b).

Another risk is the possibility of the application of tariff rate increases in the United States and China to a broader range of goods, including pharmaceuticals and semi-conductors, with supply-chain linkages propagating these widely. Higher prices for these goods could adversely affect demand from consumers as well as businesses. Many countries would be hit by weaker US demand for products from these affected sectors. For instance, US demand for final consumption and intermediates of pharmaceuticals represents 12.2% of Ireland’s domestic value added in its exports and 4.4% in Switzerland, with a number of other European countries also exposed (Figure 1.21, Panel A). A reduction in this demand would likely affect both the pharmaceuticals sector and the chemicals sector. By contrast, a fall in US demand for computers and electronic products could have a significant impact on the domestic value added of both the computer and electronics sector and also services sectors (Figure 1.21, Panel B). These impacts would be relatively large in many South-East Asian economies.

Higher trade barriers could also be adopted in other economies to protect domestic industry against enhanced low-price competition, especially if trade is deflected away from tariff‑raising economies. More broadly, frequent trade policy changes could raise policy uncertainty further with adverse impacts on investment and consumer confidence. Higher trade policy uncertainty would also slow trade growth further (Box 1.3). The associated restructuring of production and supply chains resulting from higher trade barriers would also be likely to result in a loss of economic efficiency, and additional costs that would feed through into prices and dampen growth.

Figure ‎1.20. Global production and demand for rare earths is highly dependent on China

Note: Rare earth elements include products listed under HS codes 250810, 251320, 261400, 261510, 280530, 284610 and 284690. Panel B refers to the value of merchandise trade, and uses the Balanced International Trade Statistics database, so exports are equal to imports, and only direct trade is recorded. North America is Canada, Mexico and the United States. OECD Asia includes Japan and Korea. Other G20 includes Argentina, Australia, Brazil, India, Indonesia, Russia, Saudi Arabia, South Africa, Türkiye and the United Kingdom. South-East Asian economies include Hong Kong (China), Malaysia, the Philippines, Chinese Taipei, Thailand, Singapore, and Viet Nam. Rest of the world includes all remaining countries.

Source: Kim et al. (2025); IEA (2025b); OECD Balanced International Merchandise Trade Statistics database; and OECD calculations.

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Figure ‎1.21. Tariffs on pharmaceutical products or semiconductors would hit output in many countries

Share of domestic value added in exports dependent on US demand

Note: In Panel A, Ireland is shown on the right-hand scale, all other countries on the left-hand scale. The panels show each country’s total domestic value added by sector that is destined for US intermediate or final consumption of pharmaceutical products (or computer and electronic products), including direct and indirect trade linkages, expressed as a share of each country’s domestic value added in total exports. “Pharmaceuticals” is the basic pharmaceuticals and preparations sector; “Chemicals” is the chemicals and chemical products sector. The computer and electronic products sector includes semi-conductor related products such as the design and use of integrated circuits.

Source: OECD Trade in Value Added (TiVA) 2025 edition; OECD ICIO 2025 edition; and OECD calculations.

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On the upside, agreements that lower bilateral tariff barriers from current levels and improve policy predictability would support stronger economic growth and trade, and lower inflation relative to the baseline. Benefits could also arise if there was to be further progress in tackling barriers to trade in cross‑border services. Services trade has been relatively robust since the global financial crisis, while merchandise trade growth has moderated (Figure 1.22, Panel A), but barriers continue to impede cross‑border trade in services. The OECD Services Trade Restrictiveness Index highlights the continued challenges of regulatory fragmentation and uneven conditions in access to cross-border markets (OECD, 2024a). Barriers to services are higher in emerging-market economies than in advanced economies, but they have declined since the pandemic, whereas those in the typical advanced economy have risen slightly (Figure 1.22, Panel B). The remaining barriers hamper trade in services as well as goods, because many services, such as logistics, are also crucial for global trade in goods. An upside risk is that new policy reforms that reduce services trade restrictiveness could reduce trade costs and result in stronger trade growth than projected.

Figure ‎1.22. Services trade needs to be supported to raise growth

Note: In Panel A, 2025 growth is annualised and based on those countries for which goods and services trade volumes are available in the first half of 2025, representing about 75% of world trade volumes. Panel B is based on the score for total services (including construction) for all emerging-market and advanced economies in the STRI database.

Source: OECD Economic Outlook 118 database; OECD Services Trade Restrictiveness Index; and OECD calculations.

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Box ‎1.3. The impact of policy uncertainty on trade growth

Trade policy uncertainty (TPU) has risen markedly over the past year (Figure 1.23) which should have a dampening effect on trade. This Box assesses the possible trade impact of higher trade policy uncertainty.

In the first half of 2025, the TPU index was almost four times higher than in 2018-19. The surge at that time may have caused as much as a 1 percentage point decrease in world trade growth (Costantinescu et al., 2019), with broader effects on prices, sourcing choices and inputs (Handley and Limão, 2022). More recently, Sampognaro (2025) estimates that monthly global merchandise trade volumes could be 5% lower than in the absence of the recent increase in uncertainty seen in 2024-25. Studies that use bilateral trade values and alternative trade uncertainty measures find a wider range of effects. Nana et al. (2025) estimate that an increase in global trade uncertainty by one standard deviation is correlated with a decline in bilateral trade values of 1.6%, whilst Jakubik and Ruta (2023) estimate that it will lower the value of bilateral trade by 3.1% between geopolitically distant countries.

Uncertainty tends to reduce trade as it increases the value of waiting rather than acting. However, in some circumstances trade could rise in the very short term when firms have an incentive to act immediately before anticipated, though unpredictable, costly policy changes. For instance, Sampognaro (2025) finds that global merchandise trade volumes increase by 1.5% in the first month following an uncertainty shock (of two standard deviations in the uncertainty index) before declining. Such a pattern was seen in the early months of 2025.

To explore these effects, the impact of trade policy uncertainty on global trade volumes is estimated using a panel vector autoregression (VAR) model and quarterly data. The model includes the growth rate of merchandise import and export volumes (consistent with national accounts data), the nominal effective exchange rate, consumption, investment and the trade policy uncertainty index.

Figure ‎1.23. Trade policy uncertainty has risen to historically high levels

Note: The Trade Policy Uncertainty Index is computed by counting the frequency of joint occurrences of trade policy and uncertainty terms across major US newspapers.

Source: Caldara, et al. (2019).

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The results suggest that a one standard deviation increase in the global trade policy uncertainty index reduces global real merchandise import growth with a peak impact of around 4.2 percentage points after one year and about 2.6 percentage points after 3 years.1 Trade policy uncertainty is accompanied by front-loading effects, which seem particularly related to investment, following a trade uncertainty shock (Figure 1.24, Panel A). This is consistent with the somewhat higher import intensity of investment compared to consumption. Based on this evidence, recent increases in trade policy uncertainty in the first three quarters of 2025, if sustained, could reduce growth in world import volumes of goods by about 3 percentage points after one year. This impact can be offset by positive shocks to other determining factors. For instance, upside surprises in investment (outlined in Box 1.2) in the first half of 2025 may have mitigated some of the downside impact of higher policy uncertainty on trade, at least in the near term.

The impact of TPU on trade volumes may also be influenced by announcements of more restrictive trade policy, although the direction of the impact is not always clear. Such policy announcements could mitigate uncertainty by making a clear policy change and reducing speculation. Alternatively, these trade policy announcements could add to the trade inhibiting effects of uncertainty, either by increasing the expected probability of negative trade policy outcomes and the expected loss (Handley and Limão, 2022), or by raising the prospects of additional action at a subsequent date.

When account is taken of the number of products affected by an import tariff at announcement date, global merchandise import growth is found to be reduced by an additional percentage point after 3 years following a one standard deviation increase in TPU (Figure 1.24, Panel B). A possible interpretation is that announcements of restrictive trade measures with a broader scope may be more likely to raise uncertainty than announcements focused only on a small number of products, particularly if they also raise uncertainty about possible retaliatory measures.

Figure ‎1.24. Trade policy uncertainty shocks inhibit trade growth

Cumulative impact of a one standard deviation increase in the trade policy uncertainty index

Note: Both panels show the estimated cumulative impact of a one standard deviation increase in the trade policy uncertainty index on merchandise import volume growth. Panel A compares the estimated impact on the growth rate of real merchandise imports, investment and household plus government consumption computed across 33 advanced countries and 23 emerging market economies. The shaded area depicts the 90% confidence band around the estimate for imports. Panel B compares the estimated impact on global import growth with and without accounting for harmful trade policy interventions proxied by the number of imported products affected by a tariff at announcement date. The shaded area depicts the 90% confidence band around the estimate for world without trade policy interventions. The dynamic panel VAR model is estimated using a generalised method of moments approach over 2017Q1-2025Q2. It includes four lags of the growth rates of real merchandise imports and exports, investment, total consumption, the effective exchange rate and the trade policy uncertainty index in the baseline version (Panel A) and it adds the number of harmful interventions on imported products as an exogenous variable in the extended version (Panel B).

Source: OECD Economic Outlook 118 database; Global Trade Alert Data Center; and OECD calculations.

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1. The results are robust when excluding 2025 data, when the TPU rose sharply, as well as 2024 data.

Inflationary pressures could resurface

Inflation could surprise on the upside, requiring higher policy interest rates than currently assumed. Indicators of underlying inflation have not yet returned fully to target in many countries, recent progress in disinflation has been limited, and inflation expectations have risen in some economies. The observed easing in global financial conditions and higher inflation in salient items such as some food products heighten this risk. Inflationary pressures could also be exacerbated if any loss of central bank credibility were to threaten the anchoring of inflation expectations. Other potential triggers for a renewed bout of inflationary pressure include supply shocks that could arise through a broadening of geopolitical tensions and trade restrictions, or a further increase in the prevalence and intensity of natural disasters in some countries. An additional potential source, particularly in the United States, is that the pass-through of tariffs into prices could strengthen more quickly than anticipated once companies exhaust the scope to absorb higher costs in their profit margins. The risk of second-round effects from such a shock generating greater inflation persistence is particularly pronounced in those economies where inflation expectations are not well‑anchored. Reflecting the recent divergence of inflation outcomes between countries, there are also downside risks in some economies where inflation outcomes have recently been benign, including China, if demand proves weaker than currently anticipated.

Financial market risks are rising

Corporate financial strains may lead to risk repricing in financial markets

Given high valuations by historical standards, repricing in equity markets is a key risk to the economy and financial stability. One trigger might be if investors’ enthusiasm for AI proves overstated, with price corrections spreading from technology stocks to broader benchmark indices. The concentration of ICT investment in the major technology firm paired with stretched valuations, signals rising exuberance and mounting risks if substantial investments fail to deliver expected returns.6 The impact on AI technology firms could be particularly severe if they are forced to write down the value of their AI-related assets due to underperformance. Despite their growing reliance on equity financing, listed AI technology firms have accumulated substantial debt (Figure 1.25, Panel A), including less transparent private debt and commercial mortgage-backed securities. This could result in a high correlation of default risk across multiple credit products.7 Any substantive correction in AI equity prices would also have a noticeable impact on the overall equity market given the increasing share of market capitalisation accounted for by the major technology stocks and the rising importance of index-linked passive investment funds (OECD, 2025a). This could be amplified by abrupt deleveraging of balance sheets, with fire sales of assets to meet margin calls or to satisfy risk limits. A downward reassessment of expected returns from AI could also soften or even halt data centre investment. This has surged over the past three years (Figure 1.25, Panel B), helping to support activity in the overall commercial real estate sector.

Figure ‎1.25. Strong growth of listed AI technology firms has had spillovers across the economy

Note. In Panel A, the sample of listed AI technology firms comprises 91 firms located across 13 jurisdictions: Canada, China, Finland, France, Germany, Hong Kong (China), Ireland, Israel, Japan; Korea, Chinese Taipei, the United Kingdom and the United States. The “Magnificent Seven” refer to the largest technology companies, namely Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Debt covers loans from banks and marketable debt securities. Short-term debt comprises all interest-bearing financial obligations maturing within one year, while long‑term debt encompasses interest-bearing obligations with maturities exceeding one year. Annual data at current prices are converted to 2024 prices using the US consumer price index. Debt and shareholders’ equity of the “Magnificent Seven” is expressed as a share of debt and shareholders’ equity of all 91 listed AI technology firms. In Panel B, the figure shows monthly seasonally adjusted values of private office and data centre construction in the United States deflated using the US consumer price index rebased to August 2025.

Source: US Census Bureau; LSEG; and OECD calculations.

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At an aggregate level, corporate balance sheets remain broadly sound, with debt-to-GDP and debt service ratios still close to their ten-year averages. Nonetheless, financial strains could still emerge in the event of adverse shocks to growth, hitting corporate earnings and debt-servicing capacity. Such shocks could also lead to repricing in financial markets, making equity financing more costly.

Contagion within and across traditional finance and crypto assets may threaten financial stability

Non-bank financial institutions (NBFIs) have grown rapidly since the global financial crisis (Figure 1.26, Panel A) and linkages between banks and non-banks have risen. Bank lending to NBFIs has expanded in recent years (Figure 1.26, Panel B), and banks have also provided liquidity backstops such as credit lines to NBFIs (Gabriel and Sterling, 2025). This partly reflects banking regulatory requirements that incentivise banks to favour exposures to NBFIs over some types of direct corporate lending (BIS, 2025a). Funding NBFIs through heavily collateralised loans, investment grade bonds or credit lines enables banks to reduce their credit risk weights and manage capital more flexibly. However, indicators of volatility for banks and non-banks are often highly correlated, especially in major crises, suggesting interlinkages. This can generate spillovers across financial intermediaries that leave banks exposed to shocks that occur outside the banking sector.

NBFIs are highly diverse, though interconnected, and are subject to differing risks and degrees of regulatory oversight. Some small but fast-expanding segments, such as private credit and equity funds and hedge funds have comparatively light regulatory frameworks. This limits the extent to which regulators and supervisors can monitor and assess system-wide risks. One such segment is real estate investment trusts (REITs) and business development companies (investment funds that lend to small and mid-sized business) who were especially prone to credit risk during the pandemic. Such private credit vehicles are often characterised by high leverage, interconnected to banks through credit lines, and less transparent than banks due to lighter reporting requirements (Acharya et al., 2024; Roulet, 2024).

Default rates have recently increased among leveraged private credit borrowers (Fitch Ratings, 2025), partly reflecting the prevalence of variable-rate loans that heighten borrowers’ sensitivity to interest rate and economic conditions (OECD, 2024b). The bankruptcy of auto parts producer First Brands Group in September 2025 marked one of the largest collapses in private debt markets in recent years, illustrating the risk of contagion to banks. Any resurgence of strains in commercial real estate (CRE) markets could raise bank non‑performing loans and generate losses for NBFIs, particularly REITs, real estate funds, and institutional investors. Elevated CRE delinquency rates in the US (especially in the office segment) and China’s protracted property downturn continue to weigh on confidence and pose headwinds in both commercial and residential real estate markets.

Crypto-assets and emerging alternatives, such as tokenised commercial bank deposits, are reshaping the payments landscape (Cecchetti and Schoenholtz, 2025).8 The rapid expansion of crypto-asset markets, their high price volatility and interconnectedness with other parts of the financial system raise financial stability risks. Recent regulatory developments for stablecoins in the United States and in the European Union, combined with ongoing innovation in crypto‑asset financial products, are likely to further promote the integration of crypto-assets into the portfolios of financial intermediaries - such as banks, insurance companies, pension funds, and investment funds - and thereby enhance linkages with traditional finance. This could generate a number of possible policy challenges, including heightened liquidity and market risks and the possibility of sudden capital outflows from emerging market economies (Box 1.4).

Figure ‎1.26. The rise of NBFIs and banks’ increasing exposure to the sector

Note: In Panel A, public financial institutions refer to development banks and government-owned financial bodies that play a role in financial intermediation. Outstanding global financial assets are expressed in USD trillion (deflated using the US consumer price index rebased to 2023) and financial assets of NBFIs are expressed as a share of the global total. In Panel B, US commercial bank loans to NBFIs are defined as the loans to non‑depository financial institutions by US commercial banks (i.e. domestically chartered commercial banks, US branches and agencies of foreign banks, and Edge Act and agreement corporations). In the euro area, loans by MFIs (monetary financial institutions) to NBFIs in the euro area are defined as the loans to euro area insurance companies and pensions funds, and other nonbank financial corporations excluding the European System of Central Banks. There is not enough information to identify MFI loans to non-euro area NBFIs. Loans to NBFIs are expressed as a share of total bank loans or assets.

Source: European Central Bank; US Federal Reserve; Financial Stability Board; and OECD calculations.

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Box ‎1.4. Growing linkages between stablecoins and traditional finance: implications for financial stability

The market valuation of crypto-assets rose to more than USD 4 trillion in October 2025, almost twice the value of a year earlier (Figure 1.27, Panel A). While delivering high returns in the recent past, crypto-asset values remain highly volatile compared to other asset classes (Figure 1.27, Panel B), as shown by the sharp 30% decline in market value between the peak reached in early October and end-November. Risks are compounded by high market concentration, with Bitcoin accounting for 57% of total crypto-market capitalisation in November 2025. The exposure of financial institutions to crypto-assets generally remains limited but interconnections are increasing, raising new financial stability issues and regulatory challenges.

Fast growth, high concentration and non-negligible risks also permeate segments of crypto-assets that are intended to be safer, such as stablecoins. Stablecoins have become an attractive means of payment, as they are intended to maintain a stable value by anchoring to a reference asset (typically US Treasury bills), offering convertibility on demand at par. They also offer fee-free, immediate and pseudonymous transactions, which is a particular advantage for payments and transfers across borders. Two issuers that mainly rely on USD-denominated collateral (Tether and USD Coin, Figure 1.27, Panel A) accounted for around 87% of the USD 298 billion market capitalisation in November 2025.

The total value of payments using stablecoins surpassed that of major traditional digital payment providers in 2024 (Figure 1.28, Panel A). Stablecoins have been primarily used so far to settle trades in other crypto-assets, and now account for around 80% of all trades on crypto-asset platforms (ECB, 2025), although usage for other payments by corporates, traditional financial intermediaries and even households has risen. However, some stablecoins have also experienced significant price volatility, particularly those that are not fully fiat-collateralised and which account for the majority of stablecoin transaction volumes (Figure 1.27, Panel B).1 Persistent deviations from par, together with instances of past failures, cast some doubt on the reliability of stablecoins as a broad means of payment and store of value. Stablecoins are typically uninsured, unlike most bank deposits, and variation in the value of their backing assets may prompt holders to request redemptions.

The growth of crypto-asset exchange-traded products (ETPs) — a new class of investment funds listed on traditional securities exchanges which track the performance of one or more underlying crypto-assets — is likely to ease access to crypto-assets further. Exposure to this asset class by traditional investors such as banks, insurance companies, pension funds, and investment funds could increase as a result (ESRB, 2025). As with other investment funds, crypto-asset ETPs are vulnerable to investors’ redemption runs and the ensuing asset fire sales, a risk compounded by fragile infrastructure to issue and redeem shares and trade assets.2 As the currently-limited linkages between crypto-assets and traditional finance grow, so do risks to financial stability. These include liquidity shortages and fire sales of collateral, volatility in funding costs and markets, and spillovers to bank-based financial intermediation. Challenges for monetary policy transmission may also arise given the potential for stablecoins to flow seamlessly across international borders and the scale of their investments in Treasury bills (Rey, 2025).

Stablecoins could potentially affect the pricing and operation of segments of critical funding markets, such as sovereign debt ones (Aldasoro et al., 2025; OECD, 2022), as stablecoin issuers are now major holders of US Treasury bills (Figure 1.28, Panel B). Perceived high-risk stablecoins might be particularly susceptible to runs following a negative shock, such as a cybersecurity failure. Investor inflows into stablecoins and asset sales to meet redemptions could thus affect short-term bond yields and monetary policy transmission. Stablecoin issuers’ generation of additional income by using reverse repos (lending securities to traditional financial intermediaries who then pledge them as collateral) also adds to potential strains on repo market liquidity at times of stress.

Figure ‎1.27. The market value of crypto-assets has risen sharply and returns are volatile

Note: In Panel A, “Bitcoin” and “Ethereum” are the two largest crypto-assets by market value, and “Tether” and “USD Coin” are the two largest stablecoins by market value. In Panel B, volatility is defined as the annualised standard deviation of daily returns computed on moving 21-trading day windows. The stablecoins classification is based on Kosse et al. (2023), Chainalysis (2024) and CoinGecko (2024). Fiat-collateralised stablecoins (such as Tether and USD Coin) are collateralised by assets denominated in a fiat currency (e.g. US T-bills). Crypto-collateralised stablecoins are collateralised by other crypto-assets. Commodity-collateralised stablecoins are collateralised by commodities (such as gold or silver). Stablecoins can also maintain a stable value through their blockchain digital infrastructure (algorithms or protocols). Hybrid collateral models combining multiple mechanisms are the most common. The MSCI Index represents large and mid-cap firms across 23 advanced markets and 24 emerging-market countries, covering approximately 85% of the global investable equity opportunity set.

Source: CoinGecko; https://www.rwa.xyz; and OECD calculations.

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Figure ‎1.28. Stablecoins transactions and holdings of US Treasury bills are rising

Note: In Panel A, Visa, Mastercard and PayPal payments primarily reflect settlements for goods and services, while stablecoins have been primarily used so far to settle trades in other crypto-assets. All types of stablecoins are included (i.e. fiat-collateralised and others). Panel B reports holdings of US T-bills for selected domestic and foreign holders as of 2025 Q2, categorised by type and nationality. For stablecoins, holdings correspond to US T-bills held by Tether and USD Coin.

Source: Artemis Analytics; Tether and USD Coin transparency reports; US Federal Reserve; US Department of the Treasury; Visa and Mastercard annual reports; and OECD calculations.

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The growth of stablecoins may also pose risks to banks. Companies with crypto-related business models, including stablecoin issuers, also hold bank deposits (as required by regulation in some jurisdictions). This could prove an unstable deposit base if stablecoin issuers suddenly withdraw funds to meet liquidity needs (ECB 2025), potentially disrupting bank credit availability.

The growing adoption and use of stablecoins, and their ability to circulate freely across borders, also raise economic policy challenges. Exchange rate volatility in emerging-market economies could rise if capital controls are less effective at times of stress and foreign exchange regulations could be bypassed by the use of foreign‑currency denominated stablecoins. This would make standard indicators of capital outflows harder to interpret. More broadly, the use of foreign currency denominated stablecoins could weaken the control of monetary conditions by domestic central banks (BIS, 2025a). The potential use of stablecoins for illicit activities is a further concern, raising challenges for the enforcement of anti‑money laundering and financing of terrorism regulations.

Many countries have begun to develop tailored regulations relating to stablecoins, and crypto-assets more generally, with prominent recent examples including the GENIUS Act in the United States and the MiCA legislation in the European Union.3 However, regulatory approaches differ across countries and significant gaps and inconsistencies remain (FSB, 2025a). One key issue is the limited oversight of cross-border transactions, which could hamper responses to systemic risks and encourage regulatory arbitrage. The rapid growth of the stablecoin market, and the impact stablecoin usage may have on other asset markets, highlights the need for enhanced international cooperation to ensure effective regulation, supervision, and oversight of stablecoins in all jurisdictions.

1. Transaction volumes of fiat-collateralised stablecoins accounted for 31% of total stablecoin transaction volumes in 2024, down from a peak of 48% in 2023 (Visa, 2025).

2. Traditional investment funds rely on established authorised participants. In contrast, crypto-asset ETPs rely on a small number of liquidity providers (LPs) with lower credit ratings and limited reserves, with the three largest LPs accounting for more than 70% of the crypto-asset ETP market.

3. The GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins Act), was enacted in July 2025, establishing a comprehensive regulatory framework for USD-backed payment stablecoins. The 2023 EU Markets in Crypto-Assets Regulation (MiCA), effective from December 2024, provides a unified regulatory framework for crypto-assets not covered by existing legislation.

Risks in emerging market and developing economies have receded but some vulnerabilities remain

Near-term risks in emerging-market economies have receded as financial conditions have improved. Net capital flows to EMEs have been relatively resilient since the start of the year, especially to countries other than China, helped by the US dollar depreciation and a rise in risk appetite (Figure 1.29, Panel A). Many emerging market economies are in a better position than in the past to withstand global shocks. In larger and higher income emerging markets, the share of borrowing in local currency has increased and the share of non-resident investors has declined over time (IMF, 2025a). This has reduced sensitivity to global shocks as currency mismatch and the risk of a sudden stop are lower. Nonetheless, the share of marketable liabilities in total liabilities has grown (BIS, 2024), which has increased susceptibility to shifting global or local risk sentiment. A sharp repricing resulting from overstretched asset markets in the US or other major markets would lead to a substantial rise in global risk aversion which often tends to affect emerging-market economies disproportionately more than developed economies.

Sovereign borrowing risks remain. Since 2010, the total sovereign debt of emerging-market economies has quadrupled in US dollar terms and, in the median economy, almost doubled as a share of GDP. Around a fifth of outstanding bonds will mature over 2026-27, with new issuance potentially incurring higher financing costs (OECD, 2025b). A sharp appreciation of the dollar or a renewed spike in yields could make borrowing significantly more difficult, particularly in foreign currencies. However, EME credit ratings have improved this year (Khan and Jadhav, 2025) and narrowing spreads on USD-denominated sovereign bonds point to a decline in perceived default risk. The proportion of emerging-market and developing economy sovereign debt in default fell to around 1.5% in 2024 and the number of countries in default declined, although it remained high (Beers, Ndukwe and Berry, 2025).

Figure ‎1.29. Emerging-market economies have benefitted from resilient capital flows but face higher US tariffs

Note: Panel A shows gross portfolio inflows from the OECD Monthly Capital Flow dataset for 23 emerging-market economies grouped by four geographical areas. Panel B shows exports of goods to the United States as a share of GDP in 2023 compared to increases in effective US tariffs, relative to 2024, for 116 emerging-market economies. Income classifications are taken from the World Bank.

Source: OECD Monthly Capital Flow dataset; US Census Bureau; OECD BIMTS; and OECD calculations.

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The rise in US tariffs could hit some emerging and developing economies particularly hard. For example, Cambodia, Nicaragua and Viet Nam export goods to the United States equivalent to around one‑quarter of their GDP and are facing significantly higher US tariffs (Figure 1.29, Panel B). For low-income EMEs, financing risks are compounded by a narrower investor base and falling development aid. Official development assistance declined by around 8% in 2024, reversing a trend of expanding aid (OECD, 2025c), and is likely to fall further, raising the need for additional sources of revenue in recipient countries if sharp cutbacks in activity and incomes are to be averted.

There are also potential sources of upside surprises to the outlook

Several other uncertain factors could generate upside surprises to the global economy over the next two years, in addition to reductions in trade barriers. A lasting de-escalation of conflicts in Europe and the Middle East could reduce geopolitical uncertainty, along with energy prices. Fundamentals in global oil markets currently point to downward pressure on prices, with global oil supply projected to exceed demand by over 4 million barrels per day in 2026 (IEA, 2025c).

Positive supply shocks could boost potential output growth, enabling faster output expansions than currently projected. For example, the strong momentum in AI-related investment in the United States could broaden to other major economies, boosting current spending and potentially raising productivity growth in the future. The extent and timing of productivity gains related to the adoption of AI is highly uncertain, but it is possible that such gains become more visible than currently anticipated over the next two years. Previous general‑purpose technologies, such as the internet, took considerable time to be broadly adopted and to deliver substantial productivity effects. However, the relatively fast pace of AI adoption in many economies to date, reflecting the user-friendly nature of the technologies and rapid declines in user costs, may work in favour of AI having more rapid adoption and productivity impacts (Filippucci et. al., 2025). The potential for faster adoption could be enhanced in those economies where governments undertake complimentary reforms, including by improving public investment in digital infrastructure for AI, strengthening digital and AI-related skills programmes and ensuring regulatory frameworks promote competition in the sector.

More broadly, the growth outlook could be boosted gradually in the event that governments undertake growth-enhancing structural reforms beyond those currently incorporated in the projections. Reforms that reduce barriers to the reallocation of labour and capital would be particularly important as businesses further adapt to new trade policies and new technologies amid heightened policy uncertainty. Such measures could include governance reforms and lower regulatory barriers to firm entry, initiatives that enhance access to finance for high potential businesses and those that increase the ability of individuals to join the labour force and transfer jobs. Estimates using the OECD Long-Term Model highlight that a package of reforms that involves reducing product market regulation, raising female employment rates and improving the rule of law could boost average annual real GDP growth by 0.2 percentage points in the advanced G20 economies and 0.8 percentage points in emerging-market G20 economies (OECD, 2025d).

Policies

Trade tensions need to be resolved

Countries need to find ways of engaging co-operatively within the global trading system and working together to make trade policy more predictable and secure a lasting resolution to trade tensions. Agreements to improve access to national markets, and clear and transparent trade policies, would reduce policy uncertainty and strengthen the prospects for growth. Steps to lower tariffs and non‑tariff barriers, deepen trade agreements or reduce barriers to trade in services would all benefit productivity and living standards. Efforts to prevent further trade fragmentation should be coupled with reforms that enhance diversification, reduce vulnerabilities and strengthen the resilience of supply chains. This would help to align economic security objectives with continued growth while preserving the economic benefits and predictability of open markets and a rules-based trading system.

Greater use of export controls raises uncertainty and generates adverse supply shocks, particularly when they are applied to critical products with few suppliers. Holding greater inventory stocks could help to buffer such shocks, but might also raise working costs for businesses. National stocks of key products can help when private costs are prohibitively high. However, lessons from the pandemic show that accumulating inventories in times of crisis can also exacerbate global supply shortages (OECD, 2023). International co‑ordination to align stockpiling strategies as well as long-term planning can help to mitigate these risks (OECD, 2023).9 Over the long term, countries need to support efforts to reduce critical dependencies by developing alternative technologies to better ensure resilience, and encourage diversification of suppliers and buyers.

Monetary policy should remain vigilant

In recent months reductions in policy interest rates have continued in many advanced economies, and resumed in Canada and the United States. In contrast, policy rates have remained unchanged since June in the euro area, following a 2 percentage point decrease since June 2024 and where inflation is close to target. Central bank balance sheet reductions have continued in several advanced economies, though the United Kingdom has slowed quantitative tightening and the United States has brought it to an end at the beginning of December. The monetary policy stance has become less restrictive in most advanced economies, and no longer restrictive in some (see below), despite forward‑looking long-term real interest rates remaining well above pre‑pandemic norms (Figure 1.30). In Japan, monetary accommodation has continued to be gradually withdrawn, with further steps to reduce central bank asset holdings and real interest rates edging upwards, though policy rates have remained unchanged since January.

Central banks will need to remain vigilant and attentive to shifts in the balance of risks around economic and financial developments to ensure that underlying inflation pressures are durably contained. A one-off tariff-induced rise in the relative price of tradeable goods, even if it materialises only gradually, can be looked through provided inflation expectations do not rise, but policy adjustment may be needed if there are broader price increases or weaker labour market conditions. Central bank independence, both legal and operational, and accountability help to ensure that long-term inflation expectations remain well anchored, as policymakers can respond quickly to changes in the balance of risks for price stability and lower the volatility and persistence of inflation.

Figure ‎1.30. Real short-term interest rates have eased

Note: Based on data up to 26 November 2025. In Panel A, real short-term interest rates are calculated using nominal one-year government bond yields and one year-ahead inflation expectations by consumers in the United States, the euro area and the United Kingdom, and by corporates participating in the Tankan Survey in Japan. In Panel B, the real long-term interest rates show 10-year inflation-linked bond yields.

Source: Bank of Japan; European Central Bank; University of Michigan; YouGov/Citigroup and OECD calculations.

Under the projected outlook for inflation and GDP growth, policy rate reductions are expected to continue in the next few quarters in many major advanced economies (Figure 1.31). Central banks in smaller advanced economies are expected to have more diverse policy rate trajectories, with rate reductions extending well into 2027 in some cases.

• In the United States, the federal funds rate is projected to decline gradually from 3¾-4 per cent at present to 3¼-3½ per cent by end-2026 and remain unchanged afterwards. Aggregate securities holdings of the Federal Reserve are projected to remain unchanged, with maturing Treasury securities being rolled over and maturing agency securities being reinvested into Treasury bills.

• In the euro area, policy rates are projected to remain unchanged until end-2027, with inflation staying close to the target and the deposit facility rate at 2%. The decline in Eurosystem bond holdings is expected to continue broadly at the pace observed in 2025, with no reinvestment of redemptions under either the asset purchase programme or the pandemic emergency purchase programme.

• In Japan, the policy rate is projected to increase gradually from 0.5% at present to 2% by the end of 2027, as core inflation stabilises around 2% and a negative output gap gradually closes. The government bond holdings of the Bank of Japan are expected to decline further, as the bank’s monthly gross purchases are to be reduced by about JPY 400 billion per quarter until the first quarter of 2026, and by about JPY 200 billion per quarter thereafter. Other Bank of Japan outstanding assets (those under the loan support programme, corporate bonds, exchange-traded funds and Japan real estate investment trusts) are also expected to decrease.

• Reductions in policy rates are projected to have now ended in Canada, and to cease in the first half of 2026 in Korea and the United Kingdom and in the second half of 2026 in Australia. Central bank bond holdings are assumed to decline further in Australia and the United Kingdom, albeit in the latter at a slower pace decided in September 2025. In Canada, asset purchases through term repos followed by sovereign debt purchases are expected, allowing the balance sheet size to eventually expand modestly in line with the growth of the economy.

Figure ‎1.31. Policy rate reductions are projected to end next year in many advanced economies

Policy interest rates

Note: The first panel shows the midpoint of the federal funds target range for the United States and the deposit facility rate for the euro area.

Source: OECD Economic Outlook 118 database.

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In many advanced economies, real policy rates are already close to or within estimated ranges for real neutral rates – the real interest rate at which the policy stance is neither accommodative nor restrictive – and all are projected to be so at the end of 2027, with inflation back or close to target at that time (Figure 1.32, Panel A), although neutral rate estimates are surrounded by considerable uncertainty. Stronger productivity and investment, for instance as a result of widespread AI adoption, could make the future neutral rate be higher than current estimates suggest (Rachel, 2025), as could higher public debt and quantitative tightening (Schnabel, 2025). On the other hand, lower immigration and tariff increases could put downward pressure on the neutral rate (Miran, 2025), though the impact from tariffs could largely disappear in the long run (Mehrotra and Waugh, 2025).

Figure ‎1.32. Real policy rates are projected to converge to neutral level ranges

Real policy rate and range for real neutral rates

Note: The projected real policy rates in 2027Q4 are calculated using projected nominal policy rates deflated by projected annual core inflation over the year to 2027Q4 (except for India and Indonesia, where headline inflation is used). For each jurisdiction, the figure shows a range (min-max) of estimates for the real neutral rate, understood as a longer-run equilibrium real short-term interest rate. These estimates refer to the recent past. The minimum and maximum values come from the estimates of different models or sources and the ensuing ranges should not be regarded as confidence intervals. The estimates for Colombia and South Africa are from a single model or source.

Source: OECD Economic Outlook 118 database; Banco Central do Brasil (2024); Banco Central de Chile (2024); Banco de Mexico (2024); Banco de la República (2025); Bank of Canada (2025); Beyer et al. (2025); Castaing et al. (2024); Do et al. (2024); Ellis (2022); Federal Reserve Bank of New York (2025); Federal Reserve Bank of Richmond (2025); IMF (2023a), IMF (2023b); Lubik et al. (2024); Nakano et al. (2024); Norges Bank (2025); Reserve Bank of India (2024); Segura-Rodriguez (2024); South African Reserve Bank (2025); and OECD calculations.

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Active supervision and monitoring are needed to address financial stability risks

Stretched valuations in financial markets, including the rapid growth in crypto-asset market capitalisation, and the growing interconnections between banks and non-bank financial institutions call for enhanced vigilance to safeguard financial stability. Effective monitoring, supervision and robust regulatory policies are needed, in line with internationally-recommended norms, with reforms being implemented across jurisdictions in a timely and consistent manner to minimise regulatory arbitrage.

For banks, countries should ensure that they have sufficient levels of capital and liquidity to withstand shocks, drawing on the guidelines of the Basel III framework. This would help to protect against risks of banking failures and adverse spillovers from NBFIs given their growing interconnectedness with banks. Further progress is also required to safeguard against the risks from highly diverse NBFI business models, following the FSB/G20 recommendations (FSB, 2025b), including the collection of timely and more comprehensive data and closer scrutiny of structural vulnerabilities from liquidity and leverage, especially in investment funds and asset management firms. More broadly the interconnections between banks and non-banks enhance the case for joint assessment of their balance sheets and for bank stress tests which incorporate those interconnections (Acharya et al., 2024). Likewise, liquidity stress tests of investment funds subject to investor redemptions are a priority. The financial authorities should also identify highly interconnected, systemically important NBFIs to develop entity-specific regulatory and supervisory requirements (BIS, 2025b). Recovery and resolution plans could also be established for NBFIs to enable the orderly exit of unviable entities without jeopardising systemic stability.

Crypto-assets present a broad range of policy challenges. Effective monitoring of developments and risks requires improvements in timely data disclosure and regulatory reporting, as well as structured and systematic use of available information, such as that from incumbent financial institutions or public and commercial data sources. Countries should also perform comprehensive assessments of current gaps in regulation and supervision, custody and eligibility of collateral, recovery and resolution planning, and insolvency frameworks (FSB, 2023, 2025a). Enhanced international cooperation is key to ensure efficient cross-border regulation and supervision as well as clear institutional accountability.

Tighter fiscal policy is needed to contain rising debt burdens

On the basis of the latest budget proposals, the fiscal stance is projected to ease slightly in many advanced economies in 2025 and 2026 before tightening in most countries in 2027. The projected median change in underlying primary balances (one indicator of the structural fiscal position) from 2025 to 2027 is a modest improvement worth 0.3% of potential GDP. The gross government debt-to-GDP ratio is expected to rise further between 2025 and 2027 in a majority of economies, and by 2.6 percentage points in the OECD overall. Only a small number of countries are planning significant fiscal tightening over the next two years, and a handful are likely to see marked fiscal easing, including Germany. The fiscal projections for 2026-27 for advanced and emerging market economies (discussed below) are conditional on announced government measures and OECD assessments of current plans (Annex 1.A).

• The United States’ aggregate (general government) budget deficit is currently estimated to be 7½ per cent of GDP and is expected to rise a little further over the next two years. The structural primary budget deficit is also projected to remain large, at 3.5% of potential GDP in 2027. Despite a small improvement in the underlying fiscal position this year and in 2026 – in part from higher tariff revenues and lower-than-expected government purchases – the government debt burden will continue to grow. The partial shutdown of the US federal government from 1 October to 12 November 2025 is assumed to have reduced public outlays only temporarily.

• In the euro area, the underlying primary deficit is estimated to be 1.3% of GDP in 2025 and projected to remain broadly unchanged over the next two years. This reflects a wind down of spending tied to NextGenerationEU (NGEU) offset by an increase in defence outlays. The aggregate projection also masks diverging outcomes across the euro area’s largest economies. In France, fiscal tightening of 1% of GDP is projected in 2026-27. The end of NGEU stimulus is expected to contribute to fiscal tightening in a number of countries in 2027, including Italy and Spain. A fiscal tightening of 0.3% of GDP is also projected in Italy in 2026. In contrast, a major fiscal expansion in Germany is projected to cause the underlying balance to deteriorate by 1.4% of GDP over 2025-27. To some extent, this reflects initial differences in the fiscal position of these countries, with Italy having a high debt level, France rising debt and a sizeable budget deficit and Germany having a relatively low debt level.

• Japan’s structural primary budget, estimated to be in a modest surplus this year, is projected to weaken by 0.2% of GDP over the next two years. A new stimulus package aimed at lifting investment, easing cost-of-living pressures, and strengthening defence will drive up spending relative to government revenues in 2026. A fiscal tightening is expected in 2027, but the general government budget deficit is projected to still be larger than in 2025.

• Substantial fiscal tightening of 1% of potential GDP or more is projected over 2026-27 in Iceland, Israel, Poland, the United Kingdom and a few smaller euro area member states. In contrast, sizeable fiscal expansions are projected in Denmark and Sweden, both countries cutting taxes and increasing government investment, notably on defence. In Denmark, public outlays on social benefits are also expected to increase. Underlying primary balances are expected to worsen slightly in Canada and Korea in the next two years. Australia’s underlying primary deficit is projected to narrow.

With lower nominal growth and bond yields having risen substantially since the pandemic, including recently on very long-term debt, stronger primary balances are needed to keep public debt burdens from increasing. In most advanced economies, including some major economies (Figure 1.33), gross financial liabilities are again rising more rapidly than GDP due to persistent primary deficits and GDP growth that no longer exceeds the effective interest rate on debt. This is reflected in rising projections for the weighted average of OECD economies’ gross public debt – which is projected to reach 113% of GDP by the end of 2027.

Figure ‎1.33. Primary deficits, net interest payments and change in public debt ratios

Note: “Primary deficit” denotes the general government primary budget deficit. “Net interest” is interest payments on general government debt less interest receipts. “Debt ratio change” shows the annual change in the ratio of general government gross financial liabilities to GDP starting from 2025.

Source: OECD Economic Outlook 118 database; and OECD calculations.

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Many advanced economies have begun to implement plans to bolster defence spending, including NATO countries who have committed to allocating 3.5% of GDP to core military spending by 2035 (Figure 34). Near-term gains to economic activity are expected in countries borrowing to finance re‑armament, with potentially larger payoffs in economies with ample spare capacity and established local defence industries. Lasting benefits may, however, be modest in many small, highly-open economies heavily reliant on purchases of foreign-produced military equipment. Positive growth effects are likely to offset only partially the costs of higher spending. Some countries can afford to sustain higher debt‑financed expenditure on defence for some time, with debt ratios climbing above current levels. However, even in these countries, concurrent pressures to spend more on health, long‑term care and climate measures will eventually absorb fiscal room for manoeuvre, requiring spending reallocation.

Figure ‎1.34. Military spending is increasing at different rates across countries

Note: In Panel A, the figure is based on data for the top 10 military spenders in nominal terms (US dollars, 2024) among European member countries of the OECD. In 2024, those countries were Denmark, France, Germany, Italy, the Netherlands, Norway, Poland, Spain, Sweden and the United Kingdom (all NATO members). The dotted line shows the 3.5% of GDP commitment for core defence spending agreed at the 2025 NATO summit. Countries agreed to submit annual plans showing "a credible, incremental path" to this goal. The shaded area shows the range of defence spending outcomes across countries in the sample. In Panel B, markers show planned or proposed spending for the years indicated based on published budget or defence plans. Where projections are not available for years between now and 2035, implied gaps to targets are assumed to close linearly (dotted lines). SIPRI data are used for outcomes.

Source: Stockholm International Peace Research Institute (SIPRI); national budgets and planning documents; and OECD calculations.

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Credible and well-designed fiscal measures are required to safeguard public debt sustainability

Resilient growth, lower inflation and monetary policy normalisation create greater scope for more ambitious fiscal consolidation in many countries to ensure longer-term debt sustainability. Optimal fiscal adjustments will vary across economies and depend on initial conditions, including the state of the public finances and the economy. A reduction and reallocation of government outlays would be desirable where debt needs to be lowered and spending is high relative to the size of the economy, with past experience suggesting that expenditure‑based corrections tend to be more sustainable than predominantly revenue-based consolidations (Pina et al., 2025). Higher tax receipts may also be needed where revenue is low as a share of the economy and there is room to lift revenues in a manner that limits distortions to work incentives and economic activity. Fiscal consolidation should in all cases be guided by credible medium-term plans, supported by strong fiscal institutions. Delaying budgetary corrections could increase risks to financial stability, especially in high-debt countries, and further deplete the resources available to manage future shocks. There are different avenues to consolidation, and governments should weigh up distributional effects and consequences for potential growth against other considerations.

Containing and reallocating public spending, and improved public sector efficiency are essential in many countries to limit the need for further tax increases. Reforms, where needed, to increase legislated pension ages to account for gains in life expectancy are one important step, provided they are phased in with adequate provision for the most disadvantaged and measures to support the employment of older workers. Undoing past reforms of this type would complicate the task of budget repair and go against efforts to encourage longer working lives. When adjusting the social safety net, care is needed to navigate trade‑offs between the distributive effects of such measures and their impacts on the budget and work incentives. For instance, reducing access to government-funded health insurance may directly reduce public spending, but poorly-targeted measures could cause low-income families and people with disability to forego essential medical spending or add to financial distress.

Expenditure restraint and reallocation can also be achieved through regular reviews of government programmes, enhanced use of digital technologies and better public procurement. Ahead of large military purchases many advanced economies are looking to reform defence procurement, including Canada, Denmark, Germany, Japan and New Zealand. Current proposals aim to enhance the efficiency of public investment, improve coordination with allies and advance strategic objectives. Procurement reforms should take account of the need to ensure open and competitive bidding, foster innovation, and, for the EU, promote an efficient regional market by harmonising procurement standards.

Tax revenues can be raised by broadening tax bases and improving tax compliance where the latter is low, as well as by raising rates. Tax reforms should be designed with due account taken of their interactions with the transfer system and avoid the burden of consolidation falling heavily on those least able to bear it. As far as possible, reforms should also aim to eliminate distortions that discourage work, inhibit innovation and undermine growth potential.

• Many countries have in the past turned to value added taxes to increase revenues. As a share of tax receipts in OECD countries, VAT – which is relatively efficient when levied on a broad base of goods and services – increased from below 5% in the mid-1960s to around 20% by the early 2000s before stabilising around that level, while the average standard VAT rate continued increasing into the late 2010s (OECD 2024c). In some countries (notably Australia, Japan, Korea and Switzerland) standard rates of VAT (sometimes called goods and services tax) remain low, and in the United States, there is no federal value added tax.10 This suggests scope for raising revenue relatively efficiently, particularly where tax bases are narrow. In other economies, including many EU member states, standard VAT rates are relatively high already. Such countries may need to look more broadly at eliminating inefficient tax expenditures, broadening tax bases, or turn to underexploited taxes to tackle structural revenue shortfalls.

• Effective taxation of housing, and capital more broadly, can limit distortions to economic activity while helping address income and wealth inequality. Measures to increase effective taxation of the recurrent returns to residential property and capital gains on housing assets could, in some markets, complement measures to expand housing supply and improve affordability.11

Strengthened fiscal institutions are needed to underpin the budgetary adjustments that will have to be sustained over many years in some countries. Transparency about the cost of strategically important projects, such as re-armament, should come with clear communication about the need to contain budget imbalances. Strong independent fiscal institutions have an important role to play in this regard, including in jurisdictions where numerical budget rules are currently suspended or have been relaxed, as in the European Union. Deviations from normal fiscal guardrails through escape clauses or other flexibility mechanisms should be justified and temporary.

Structural shifts in the investor base in sovereign debt markets could lead to higher interest rates and greater market volatility

Persistent budget imbalances in many advanced economies have fed concerns this year about the scale of public debt and its sustainability, reflected in rising yields on long-dated government bonds. Continued fiscal deficits imply that private investors in sovereign bond markets will need to keep absorbing significant levels of issuance, particularly in economies with ongoing quantitative tightening by central banks. This is reflected in recent shifts in the relative scale of purchases of sovereign bonds by different investor groups (Figure 1.35). Over the year to 2025Q2 there were increased net purchases relative to GDP by banks and money market funds (Australia, Canada and the euro area), other financial intermediaries, which include investment funds and securities dealers (Canada, the euro area and the United States), and foreign investors (the euro area and the United States). Net purchases of sovereign bonds by institutional investors, including pension funds and insurers, declined relative to GDP in Australia, Canada and the United States over the same period.

A shift in the balance of sovereign bond purchases from central banks to price-sensitive private sector investors could affect the required rate of return on sovereign bonds (OECD, 2025b; IMF, 2025b). Higher yields could be needed to sustain demand for government debt in coming years, particularly in countries where fiscal trajectories may be viewed as unsustainable, pushing up the cost of government borrowing. A related risk is that sovereign bond markets become more volatile. This could reduce the absorption capacity of some non-bank investors — as they may face higher liquidity needs during market stress due to the risk of investor redemptions, and the value of their existing collateral may have become less certain (ECB, 2023) — and the use of sovereign bonds as safe haven assets (Sengupta and Jacobs, 2025). Higher volatility may often coincide with higher liquidity needs due to margin calls or redemptions from investment funds, potentially forcing other NBFIs to sell assets, including sovereign bonds. Such factors could feed through into the yields on government debt.

Demand for sovereign bonds is also being impacted by reforms affecting pension funds and associated financial intermediaries, such as liability-driven investment (LDI) funds.12 In the United Kingdom, regulatory adjustments for LDI funds introduced after the 2022 gilt market dislocation — including tighter leverage limits, higher liquidity buffers, and more conservative collateral management practices — have reduced their capacity to maintain large, leveraged positions in long-dated gilts (BIS, 2025c). In the Netherlands and the United Kingdom, the shift from defined benefit to defined contribution schemes has reduced the emphasis on duration matching of fixed liabilities for pension funds, diminishing their demand for long-term sovereign bonds (PIMCO, 2023). Such reforms may contribute to lower steady-state, liability‑driven demand for long‑duration assets, potentially raising volatility at the long end of the yield curve. In contrast, in some funded pension systems, demand for safer assets such as government bonds could increase with population ageing as more participants de-risk portfolios near the end of their working lives or after retirement.

Figure ‎1.35. Net purchases of sovereign bonds by investor type in selected advanced economies

Quarterly averages

Note: Net purchases of short and long-term government debt securities, consolidated to eliminate intra-government transactions. “Other financial intermediaries” include non-money market investment funds, securities dealers and non-bank money lenders. “Institutional investors” refers to insurance companies and pension funds. “Real sectors” encompass households, non-profit organisations, and non-financial corporations. Data are seasonally adjusted and are expressed as a share of contemporaneous quarterly GDP.

Source: Australian Bureau of Statistics; European Central Bank; Federal Reserve; Statistics Canada; UK Office for National Statistics; OECD National Accounts Databases; and OECD calculations.

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Emerging market economies should ensure that inflation durably returns to target and further reform their public finances

Policy rate reductions have continued across many emerging-market economies in recent months, given currency appreciation against the US dollar this year and the likelihood of downward impacts on inflation from weaker exports to the United States and elevated uncertainty. Brazil has been the main exception, with policy rate increases until June over concerns about a de-anchoring of inflation expectations. Key policy interest rates and reserve requirements have remained unchanged at low levels in China given subdued inflation.

Scope still exists to lower policy rates in many emerging-market economies, but policy decisions are likely to remain finely balanced and policy rates are already close to estimates of neutral rate ranges in some countries, including Costa Rica, India and Peru (Figure 1.32, Panel B). Careful calibration of monetary policy will be essential to minimise risks of currency volatility and keep inflation expectations well anchored. If necessary, rate reductions may need to be slowed, or even reversed temporarily, to ensure price stability.

The expected pace of policy rate reductions is projected to vary across countries (Figure 1.36):

• China is expected to maintain an accommodative monetary stance, with the policy rate kept unchanged to support activity as inflation is likely to remain low, despite some upward pressures from the additional tariffs on imports from the United States.

• Malaysia, Peru and Viet Nam are also projected to keep policy rates unchanged, with inflation generally subdued and rates already close to or below neutral level estimates.

• In Costa Rica, India and Indonesia, only modest further policy rate reductions are expected, with rates stabilising at broadly neutral levels in the course of 2026.

• In Chile, Mexico and South Africa, more substantial policy rate reductions are expected to continue, sometimes well into 2027, as inflation falls further and, in the case of South Africa, converges towards the new 3% inflation target.

• In Brazil and Colombia, where disinflation has stalled, policy remains tight and rate reductions are projected to resume only gradually. By end-2027, the policy rates for these countries are expected to reach 10.5% and 6.5%, respectively, coming closer to neutral level estimates.

• In Türkiye, where still very high inflation is projected to decline to around 10% by end-2027, policy rate reductions exceeding 20 percentage points are expected over the next two years.

• In Argentina, a new monetary policy regime was adopted in June. The policy rate is no longer used as an instrument since the central bank targets the growth rate of a monetary aggregate.

Figure ‎1.36. Lower policy rates are projected in many emerging-market economies as inflation converges to targets

Note: The emerging-market economies considered are Brazil, Chile, China, Colombia, Costa Rica, India, Indonesia, Malaysia, Mexico, Peru, the Philippines, Romania, Saudi Arabia, South Africa, Thailand, Türkiye and Viet Nam. The blue area shows the 25th and 75th percentiles of policy rates for the Panel A and of annual headline inflation for the Panel B.

Source: OECD Economic Outlook 118 database; and OECD calculations.

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Government debt and debt burdens have continued to rise in the emerging-market and developing economies, with the debt-to-GDP now estimated to be almost 30% of GDP higher than in 2015. Fiscal balances are generally expected to have improved this year in the emerging-market economies, in some cases from a large deficit in 2024 (Figure 1.37, Panel A). In Chile, Costa Rica, Mexico and Peru, fiscal deficits have narrowed on the back of restrained spending, and increased tax revenues should help improve the fiscal balance in Türkiye. In contrast, the large fiscal deficit in Brazil is expected to remain broadly unchanged in 2025. Similarly, in Indonesia spending on free school meals will not be fully offset by spending cuts elsewhere, leading to little improvement in fiscal balances. In South Africa a government transfer to a state-owned enterprise is expected to temporarily widen the fiscal deficit. In China the fiscal deficit is also expected to rise in 2025, partly reflecting greater budget support for investment and a continuation of the trade-in programme.

Fiscal consolidation is expected over 2026 and 2027, though with considerable cross‑country variation (Figure 1.37, Panels B and C). Budget deficits are expected to decrease steadily in Chile, Colombia and Peru, though spending pressures and lower tax revenues have led to a suspension of the fiscal rule in Colombia. In Romania, substantial consolidation efforts are projected in 2025 and 2026, but the fiscal deficit is likely to still remain high. In Costa Rica, rising interest payments are likely to offset improvements in the primary balance leading to little change in the overall fiscal balance. In Brazil, income tax reform is expected to be broadly revenue-neutral, with no improvement in the fiscal balance in 2026‑27, although an approval of additional taxation measures could help reduce the deficit. China, Indonesia, Malaysia, the Philippines, Thailand and Viet Nam are projected to see moderate improvement in their fiscal balances. The fiscal deficit is projected to remain broadly unchanged in India, where consumption tax reform will reduce revenues and slow the consolidation process despite its positive impact on demand.

Figure ‎1.37. Fiscal balances are expected to improve in most emerging-market economies

Annual change in the ratio of the headline fiscal balance to GDP and in the output gap

Note: The chart is based on central government financial balances for Chile, Colombia, and Costa Rica and on broader government definitions (often general government) for the other economies. Fiscal balances are often not comparable across countries as different concepts are applied. Fiscal balances and output gaps for India refer to fiscal years. Positive changes correspond to improved financial balances or less spare capacity (for instance, smaller deficits or a smaller negative output gap).

Source: OECD Economic Outlook 118 database; and OECD calculations.

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Emerging-market economies need to improve fiscal sustainability while fostering growth. As fiscal deficits persist and public debt continues to rise, many governments remain exposed to rapid shifts in risk sentiment. Credible and well-designed budgetary measures are needed to safeguard public debt sustainability and create fiscal space to deal with future shocks and spending needs related to infrastructure, climate-related losses and strengthening social safety nets. Governments should maintain consolidation efforts and meet fiscal targets where economic conditions allow. Some spending needs could be met by reallocating existing spending towards enhancing physical and human capital while reinforcing adequate social protection. Raising spending efficiency through reductions in subsidies, and better targeting of social benefits, could also reduce spending pressures.13 Spending reviews, strengthened public procurement practices, and enhanced use of digital technologies could also help to create additional budgetary space. Revenues should be enhanced by broadening tax bases, raising tax compliance and collection, and curbing informality. While emerging market economies have boosted their resilience to global shocks over the past two decades (IMF, 2025a; World Bank, 2025), efforts to strengthen monetary and fiscal frameworks can increase resilience further.

Regulatory policy reforms could boost business dynamism and productivity growth

With constrained fiscal capacity in many economies and new trade barriers having been enacted, structural reforms can help mitigate the medium and long-term headwinds facing economic growth and help secure debt sustainability. One area of focus should be regulatory reforms, particularly those that improve the incentives and ability for businesses to innovate and grow and the capacity for workers to move to those parts of the economy where their skills are most needed. Through enabling better resource reallocation, such improvements increase the adaptability of economies and the ability to respond to future shocks.

As detailed in the special chapter of this OECD Economic Outlook (see Chapter 2), the stock of regulations appears to have been rising across many OECD economies. Regulations are important for achieving economic and social objectives, especially when introduced to target substantive market failures. However, the rising stock of regulations has recently been accompanied by greater complexity of regulations and a plateau in the adoption of good regulatory practices. The majority of business organisations in OECD member countries perceive administrative costs to have risen, according to the OECD Simplifying for Success Survey (OECD, 2025e). Increased regulatory compliance burdens appear to be a factor associated with weaker labour productivity growth (Figure 1.38, Panel A) and business dynamism since the early 2000s in many OECD economies (Figure 1.38 Panel B). As an example, new OECD estimates suggest that labour resources equivalent to around 4¼ per cent of the total wage bill in the average US state were devoted to regulatory compliance in 2024. The rise in this regulatory compliance burden over the past 10 years is estimated to have reduced labour productivity by 0.5%. In part this stems from reduced business dynamism, with the rise in regulatory compliance costs estimated to have lowered the share of workers in young firms by almost 0.4 percentage points.

Figure ‎1.38. Productivity growth and economic dynamism have slowed

Note: In Panel A, potential GDP per capita growth is decomposed into the estimated contribution from investment (capital per worker), productivity (trend labour efficiency) and employment and demographics (the sum of the contribution from trend working-age population and trend employment rate). In Panel B, the figure reports the average of within-country–industry cumulative changes in percentage points relative to 2004. Estimates are based on data for 12 countries (Austria, Belgium, Finland, France, Germany, Italy, Hungary, Portugal, Slovenia, Spain, Türkiye and the United Kingdom) over the period 2004–2022.

Source: OECD Economic Outlook 118 database; Calvino, F., C. Criscuolo and R. Verlhac (2020); Cho, W. et al. (2024); and OECD calculations.

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To improve the regulatory environment in a manner which benefits both social and economic outcomes, there are several channels available. The chapter largely focuses on policy approaches that work through raising business dynamism in the economy. These include:

• Reforming regulatory governance and institutional frameworks to make regulatory processes more effective and efficient. Institutional reforms are needed in many economies to improve the clarity and predictability of the regulatory environment and to better manage the regulatory stock. The latter can benefit from undertaking systematic ex post evaluations of existing regulations, which can help identify where regulations have become redundant or need updating.

• Making product and labour market regulations more conducive to business dynamism and labour mobility. This includes measures that streamline administrative, licensing and permitting processes and improve the efficiency of insolvency regulations to ease firm exit. In many economies, there is scope to reduce regulatory restrictions without compromising quality standards in the services sector, particularly by lowering regulatory barriers to competition in the professional services and retail sectors. In addition, labour market regulations should be well designed to balance the protection of workers and ensure adequate flexibility. Constraints to labour mobility, such as post‑employment restraint clauses, should be reviewed to ensure they are not hurting outcomes for both employees and firms.

• Redesigning housing regulations to promote affordability and mobility. For example, reforming spatial planning policies that overly restrict housing supply in desirable locations, as well as any regulations related to rent controls and tenant-landlord regulations which reduce incentives for housing investment.

• Ensuring regulatory frameworks keep pace with digitalisation. New digital regulations, such as those related to AI, could reduce the cost and increase the speed of regulatory decisions. However, such regulations also need to ensure that a competitive and innovative environment is maintained, and to adequately balance safety and incentives to innovate. International cooperation will be particularly important in the regulation of digital technologies to avoid fragmentation and loopholes.

• Confronting regulatory barriers that inhibit electrification and the updating of energy systems. Leveraging the efficiency gains of electrification while meeting rising electricity demand amid the green and digital transitions will require modernising outdated regulatory frameworks that hinder investment, flexibility, and the efficient deployment of energy infrastructure.

Improving financial regulations should also be an important focus of policymakers in many countries. When financial regulations are well‑designed, they help enable the efficient allocation of capital and safeguard the financial system from the accumulation of systemic risks. However, achieving the right balance between a financial regulatory framework that is sufficiently rigorous to address market failures while remaining adaptable and not becoming excessively complex can be challenging. In many countries, there has been a trend towards higher complexity in financial regulation (Gai, et. al. 2019). Reducing unnecessary regulatory complexity helps lower the burden on both regulatory authorities and those entities complying with the regulatory regime. It can also reduce the incentive for the transfer of risks to institutions outside the regulatory perimeter. When risks materialise, a less complex regulatory framework can improve the accountability of regulators and supervisors and help clarify the responsible entities in developing a policy response.

The country-specific policy recommendations for regulatory reforms in Chapter 3 are summarised in Figure 1.39.

• The need for reforms to simplify regulatory processes is widely recommended, including for most OECD countries. For example, efforts to streamline regulatory processes for business registration are needed, including in Argentina, Brazil, Bulgaria, China, Colombia, Estonia, Hungary, Iceland, Ireland, Israel, Japan, Mexico, Norway, Poland, Peru, Romania, the Slovak Republic and Slovenia. In addition, harmonising regulations across levels of government would simplify the regulatory framework in Australia, Germany, India and Switzerland.

• Institutional arrangements for regulatory design and oversight need to be improved in several countries, including through more rigorous use of cost-benefit analysis of regulations in the euro area and China. In China, greater consumer protection is also needed along with better institutional oversight of regulations. Initiatives to improve regulatory enforcement are also recommended in some other emerging-market economies, including Argentina and Thailand.

• The need to lower regulatory barriers to product market entry is widely recommended. This appears to particularly be the case in services sectors in advanced economies, such as in France where there are high barriers to entry for architects and accountants and stringent practice controls for lawyers and real estate agents. Reforms that reduce restrictions on entry to professional services would similarly boost growth in Austria, Belgium, Brazil, Czechia, Estonia, Ireland, Israel, Luxembourg and the Slovak Republic. There is also scope for rationalising such barriers in network sectors in some countries, including in Canada, Korea, Lithuania and the United States. Regulatory barriers to inward foreign direct investments could also be eased, especially in emerging-market economies such as Costa Rica, Indonesia, Thailand and Viet Nam.

• To help facilitate firm exit and improve business dynamism, improved insolvency regulations are recommended for several European economies, including Belgium, Hungary, Iceland, the Netherlands and Romania, as well as in South Africa and Türkiye.

• Reforms to housing regulations are identified as a priority for several advanced economies, such as changes to spatial planning policies in Australia, the United Kingdom and the United States.

Figure ‎1.39. Simplifying regulations is a reform priority in many economies

Policy recommendations for regulatory reforms, number of countries

Note: Policy recommendations are taken from the Economic Outlook 118 country notes (see details in the Chapter 3 “Developments in individual OECD and selected non-member economies”) for 55 countries and the euro area. The figure shows the number of countries with policy recommendations for regulatory reforms in each given category.

Source: OECD Economic Outlook 118 database.

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As the complexity of global trade regulations increases, transparent, impartial and clear trade regulations would help firms navigate shifts in policy whilst supporting overall policy objectives. The OECD’s trade facilitation index suggests that there is still considerable room to improve how goods cross borders, although with regional differences (Figure 1.40). Automation and simplification of border procedures, and improving the predictability of procedures are amongst the important steps countries can take to increase the potential productivity‑enhancing effects of trade and lower costs for export of products reliant on imports. An important aspect of regulatory efficiency is the interoperability of different national regulatory and border management systems. Traded goods often require certification or authorisation from numerous domestic agencies such as health and safety, standards boards, and industry regulators, as well as customs administrations. Improving information sharing between these entities and ensuring compatible data standards and interoperable digital platforms, could significantly support trade (OECD, 2025f).

In addition, facilitating cross-border agency cooperation and recognition of domestic procedures will become increasingly relevant as companies grapple with the rising complexity of certification schemes at national borders. Aligning national regulatory standards would also support trade, including ongoing efforts to harmonise regulations between countries in the European Union.14 Given the growing diversity of certification and compliance schemes at national borders, there is an increasing need for mechanisms to ensure cross-border agency cooperation and enhanced use of international standards. Expanding mutual recognition arrangements offers a practical way to address differences in technical regulations while safeguarding public policy objectives such as consumer safety.

Figure ‎1.40. There is room to improve the regulatory framework for trade

Trade facilitation indicators by policy area

Note: A score of 2 is the maximum performance that can be achieved. Average scores are shown for countries in each region.

Source: OECD Trade Facilitation Indicators database, 2025.

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Annex 1.A. Policy and other assumptions underlying the projections

Fiscal policy settings for 2025-27 are based as closely as possible on legislated tax and spending provisions and are consistent with the growth, inflation and wage projections. Where government plans have been announced but not legislated, they are incorporated if it is deemed clear that they will be implemented in a shape close to that announced. It is assumed that EU countries generally adopt fiscal policy adjustments which are consistent with the reformed Stability and Growth Pact, apart from those member states where planned higher net expenditure has required, or is expected to require, the activation of national escape clauses.

Projections for the EU countries account for spending financed by the NextGenerationEU (NGEU) grants and loans, based on expert judgments about the distribution of spending across years and different expenditure categories and informed by officially announced plans where available. NGEU grants are assumed to be received and spent by end-2026 at the latest and to be budget balance‑neutral, increasing both capital tax and transfers receipts and government expenditure by the same amount. In addition, positive net one-offs are added in order to reflect the discretionary stimulus associated with those grants, as measured by changes in underlying primary balances.

For monetary policy, the assumed path of policy interest rates and unconventional measures represents the most likely outcome, conditional upon the OECD projections of activity and inflation. This may differ from the stated path of the monetary authorities. In the euro area, 10-year sovereign spreads relative to Germany are assumed to remain constant over the projection period at levels close to those observed in the first half of November.

The projections assume unchanged exchange rates from those prevailing on 6 November 2025: one US dollar equals JPY 153.9, EUR 0.87 (or equivalently one euro equals USD 1.15) and 7.12 renminbi.

The price of a barrel of Brent crude oil is assumed to remain constant at USD 65 until the end of 2027. The TTF natural gas price is assumed to remain constant at EUR 35 MW/h until the end of 2027. Other commodity prices are assumed to be constant over the projection period at their average levels from October 2025.

The cut-off date for information used in the projections is 26 November 2025.

OECD quarterly projections are on a seasonal and working‑day‑adjusted basis for selected key variables. This implies that differences between adjusted and unadjusted annual data may occur, though these in general are quite small. In some countries, official forecasts of annual figures do not include working-day adjustments. Even when official forecasts do adjust for working days, the size of the adjustment may in some cases differ from that used by the OECD.

Notes

← 1.  An earlier trade agreement had also been completed with the United Kingdom.

← 2.  The effective tariff rate in November 2025 is shown as 14.6% in Figure 1.7 rather than 14.0%. This is because a monthly average tariff rate is used in Figure 1.7 whereas the latter reflects the effective tariff rate following the policy changes that occurred by mid-November.

← 3.  Switzerland and Malaysia are assumed to see a reduction in their tariff rates in line with agreements by 2026.

← 4.  Phosphors are materials that absorb energy and release it as light, and are typically used in screen displays.

← 5.  Although rare earths are geologically abundant, they require specialised, energy-intensive and often highly polluting extraction processes (IEA, 2025b).

← 6.  In 2024, the “Magnificent seven” (Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook), Microsoft, Nvidia and Tesla) represented 60% of capital expenditures of listed AI technology firms.

← 7.  Asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) are structured credit products backed by bonds or mortgages issued to AI firms or used to finance AI-related projects, such as data centres.

← 8.  Tokenised deposits, still in an experimental stage, are digital representations of traditional bank deposits.

← 9.  For example, in Switzerland, stockpiles are managed in cooperation with the private sector, with a compulsory rolling stock system, that is owned by private companies but monitored by the state (OECD, 2023; Frohm, 2024).

← 10.  Sub-national governments impose retail sales taxes, another type of consumption tax, which can be difficult to administer at higher rates.

← 11.  Examples include relaxation of zoning rules and building-height limits across metropolitan areas in Europe, coastal US states, some Canadian provinces and some Australian states.

← 12.  A LDI fund is an investment vehicle that allows institutional investors, predominantly insurers and defined-benefit pension schemes, to match the timing, size, and interest rate sensitivity of their assets and liabilities by using assets and derivatives that hedge interest rate and inflation risks.

← 13.  Recent examples of subsidy reduction include the phase out of fossil fuel subsidies in Colombia in 2022 and the reduction in diesel subsidies in Malaysia in 2024. Costa Rica, Chile and Colombia are examples of countries who have improved targeting through better use of household and social registries.

← 14.  Eliminating differences in sub-national product and labour regulations, or technical standards between provinces, would also help goods and services to flow to where they are most needed, for example in countries such as Canada.