In the past few months, we have seen a significant increase in trade barriers as well as in economic and trade policy uncertainty. This sharp rise in uncertainty has negatively impacted business and consumer confidence and is set to hold back trade and investment.
In this challenging and uncertain environment, we have downgraded our growth projections. We are now forecasting that global growth will decline from 3.3% in 2024 to a modest 2.9% in 2025 and in 2026. Weakened economic prospects will be felt around the world, with almost no exception. Lower growth and less trade will hit incomes and slow job growth.
Although inflation has recently declined in most countries, service price inflation remains stubbornly sticky and goods price inflation has increased slightly in many countries due to rising food prices. Protectionism is adding to these inflationary pressures, and inflation expectations have risen substantially in several countries. And even though we are still forecasting that inflation will come down to central bank targets by 2026 in most countries, it will now take longer to reach those targets. In the countries more affected by tariffs, inflation might even rise first before coming down.
Risks have risen significantly too. There is the risk that protectionism and trade policy uncertainty will increase even further and that additional trade barriers might be introduced. According to our simulations, additional tariffs would further reduce global growth prospects and fuel inflation, dampening global growth even more.
Fiscal risks are also increasing. Public debt levels are already elevated in many advanced and emerging market economies and spending pressures are rising in areas such as defence, investing in the green transition and costs related to the ageing of our societies. Debt service costs are rising too, further increasing pressures on public finances. High debt levels and tighter financial conditions pose particular risks for developing countries, many of which have large debt refinancing needs in the near future. Historically elevated equity valuations also increase the vulnerability to negative shocks in financial markets.
In this context, policy has a crucial role to play to tackle uncertainty and boost growth. First and foremost, it is essential to avoid further trade fragmentation and trade barriers. Agreements to ease trade tensions and lower tariffs and other trade barriers will be instrumental to revive growth and investment and avoid rising prices. This is by far the most important policy priority.
Second, given the recent inflationary pressures, monetary policy should remain vigilant. Still, if trade tensions are not intensified and inflation expectations remain anchored, policy rates can be reduced if inflation is projected to decline or remain subdued.
Third, restoring fiscal discipline is key for countries to avoid fiscal sustainability problems and build buffers for future shocks. Given high debt levels and tremendous spending pressures, countries should ensure that public debt is, indeed, on a sustainable path. Clear and credible medium-term fiscal plans are needed to show how countries intend to address pressures on public finances. Thus, reducing non-essential or inefficient expenditures by undertaking periodic spending reviews, targeting of policies, as well as raising revenues by reforming tax systems or broadening tax bases, are key policy instruments to help ensure fiscal sustainability.
Finally, boosting investment will be instrumental to revive our economies and improve public finances. As we demonstrate in our special chapter, investment has been too low since the global financial crisis. Sluggish investment has lowered growth, productivity, and living standards. Business investment has fallen not only due to uncertainty and weakened demand, but also due to structural factors. This includes declining competitive pressures and financing frictions that have become more evident as a higher share of investment has been devoted to intangible assets (such as software, R&D, etc). At the same time, housing investment has been too feeble to avoid a substantial decline in housing affordability in many countries. And public investment has also been too weak for too long in many economies.
In this Outlook, we provide recommendations for countries to foster investment and growth, including reforms enhancing competition and cutting regulatory costs, increasing public investment in energy, digital and critical infrastructures, addressing skills shortages and skills mismatches, and speeding up construction permits and licenses, as well as easing zoning and planning restrictions and rental regulations, to spur housing supply.
All in all, in the current context, governments should work together to tackle uncertainty and pursue reforms to foster growth and jobs. Trade agreements to resolve existing tensions and lower or eliminate barriers should be accompanied by more efforts to enhance multilateral cooperation. Governments also need to tackle domestic challenges to boost growth and durably raise living standards, by fostering business and public investment and by pursuing productivity-enhancing structural reforms to improve the competitiveness of their economies.
Policy has a crucial role to play in these challenging and uncertain times.
3 June 2025
Álvaro Pereira
OECD Chief Economist