OECD Economic Outlook, Volume 2025 Issue 1

Tackling Uncertainty, Reviving Growth

Report

OECD Economic Outlook

3 June 2025

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Introduction

The global outlook is becoming increasingly challenging. Substantial increases in trade barriers, tighter financial conditions, weakened business and consumer confidence, and elevated policy uncertainty all pose significant risks to growth. If these trends continue, they could substantially dampen economic prospects. Rising trade costs—particularly in countries implementing new tariffs—are likely to fuel inflation, although this may be partly offset by softer commodity prices. Risks to the outlook remain substantial. Key concerns include further escalations or sudden shifts in trade policies, more cautious behaviour from consumers and businesses, and continued repricing of risk in financial markets. Inflation may also stay elevated for longer than anticipated, especially if inflation expectations continue to rise. On the upside, an early reversal of recent trade barriers could boost economic growth and help ease inflationary pressures.

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Key figures

3.1%
⏷
2.9%

Revision to projected global GDP growth for 2025

3.0%
⏷
2.9%

Revision to projected global GDP growth for 2026

Global growth is expected to slow

Global GDP growth is projected to slow from 3.3% in 2024 to 2.9% this year and next year (based on the assumption that tariff rates as of mid-May are sustained). The slowdown is concentrated in the United States, Canada, Mexico and China, with other economies expected to see smaller downward adjustments. Growth through 2025 is expected to be especially weak, with global output rising by just 2.6% over the year to the fourth quarter, and by only 1.1% in the United States.

Inflation may prove more persistent than expected

Inflation in the OECD is now projected to be slightly higher through 2026 than previously anticipated. OECD-wide inflation is projected to reach 4.2% in 2025, up from 3.7% in the December projections, and 3.2% in 2026, compared to a previous estimate of 2.9%.

Investment has been weak

Weak investment has weighed on potential output growth since the global financial crisis (GFC), despite historically low financing costs and strong corporate profitability. The slowdown in capital accumulation largely reflects the lasting impact of two major shocks – the GFC and the COVID-19 pandemic. Housing and public investment have also slowed in many countries, contributing to a deteriorating housing affordability and public infrastructure.

What can policymakers do?

Governments need to find ways of addressing their concerns with the global trading system in a collaborative manner to avoid additional ratcheting up of retaliatory trade barriers between countries. Efforts to prevent further trade fragmentation should be coupled with reforms that strengthen the resilience of supply chains, including by encouraging firms to diversify both suppliers and buyers. Diversification would be aided by common or shared regulatory standards on key intermediate production inputs between countries.

Central banks should remain vigilant to ensure disinflation in times of heightened uncertainty and increased trade costs. Provided trade tensions do not intensify further and inflation expectations remain anchored, policy rate reductions can continue in economies where inflation is projected to moderate. Under the projected outlook for inflation and GDP growth, policy rate reductions are expected to continue during 2025 and in some cases 2026 in all the major advanced economies other than Japan.

Near-term budget pressures from debt service costs and military spending will be compounded in the long run by persisting costs associated with climate mitigation and adaptation and population ageing. Sizeable primary deficits, elevated interest payments and lower growth will keep public debt ratios high and rising in many OECD economies over 2025-26.

To keep public debt sustainable, and preserve buffers to respond to future challenges, countries should pursue fiscal reforms alongside other priorities.

Structural policy reforms play a crucial role in revitalising business investment. Reducing policy uncertainty is particularly important, as it would lower the risk premia businesses build into their hurdle rates, thereby encouraging capital spending. Policies that foster business dynamism—by promoting competition, reducing entry barriers, and supporting entrepreneurship—can further incentivise firms to innovate and invest to maintain a competitive edge. In addition, improving access to finance, especially for investments in intangible assets that are difficult to collateralise, can boost current investment by reducing the need for firms to self-fund future innovation.

Country snapshots