OECD downgrades global economy growth forecast to Covid-19 lows

The Organisation for Economic Co-operation and Development (OECD) warned that the global economy is heading into its weakest growth spell since the Covid-19 drop. The organization argued that U.S. President Donald Trump’s trade war is slowing momentum in leading economies, including the U.S.

On Tuesday, the OECD slashed its outlook for global output and the majority of the leading G20 economies. It also argued that trade negotiations would be instrumental in reviving investment and avoiding higher prices.

OECD expects the global economy to slow until next year

We have revised our outlook for global growth downwards as trade policy uncertainty weakens growth.@Santospereira_a and I launched the OECD #EconomicOutlook, which projects global eco. growth to slow from 3.3% in 2024 to 2.9% in 2025 & 2.9% in 2026: https://t.co/vopjTJ1qIY pic.twitter.com/CLbL64Fn1P

— Mathias Cormann (@MathiasCormann) June 3, 2025

The organization noted in a June 3 report that the global economy is on course to slow from 3.3% last year to 2.9% in 2025 and 2026. The figure has also surpassed 3% every year since 2020, when output dropped because of the pandemic.

The organization downgraded its expectations for this year and next from a forecast made in March, which preceded Trump’s Liberation Day tariff announcements on April 2. OECD still warned of a significant toll stemming from the tariffs and associated uncertainty over trade policy.

The Paris-based body also noted that Trump has eased some duties, but the increase in average tariff rate from 2.5% to above 15% is still unprecedented, the highest since the Second World War.

“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.”

–Alvaro Pereira, Chief Economist at OECD.

Pereira believes that weakened economic prospects will be felt globally, with almost no exception. He also added that lower growth and less trade will hit incomes and slow job growth.

The OECD said U.S. growth will slow sharply, dropping from 2.8% last year to just 1.6% in 2025 and 1.5% in 2026. The firm also believes a period of higher inflation will prevent the Federal Reserve from cutting rates this year.

The organization expects U.S. inflation to climb to nearly 4% by the end of 2025 and remain above the Fed’s target in 2026, meaning the central bank will have to wait until next year before lowering interest rates.

The economists acknowledged that the organization is still forecasting that inflation will come down to central bank targets by 2026 in most countries, but it will take longer to hit those targets. According to Pereira, inflation might rise first before coming down in countries more affected by tariffs.

OECD trims forecast for G20 countries

Compared with its March outlook, the OECD also trimmed 2025 forecasts for G20 countries, including China, France, India, Japan, South Africa, and the UK. The firm said that all countries suffered downgrades in the latest growth forecast because it is mostly responding to the uncertainty created by U.S. tariffs on the outlook for the global economy.

OECD expects China’s growth to slow from 5% last year to 4.7% in 2025 and 4.3% in 2026, while the Eurozone will expand by just 1% this year and 1.2% in 2026. The new outlook also estimates that Japan’s economy will grow by 0.7% and 0.4% this year and next. 

The intergovernmental organization also downgraded its expectations for UK growth from 1.4% to 1.3% in 2025 and from 1.2% to 1% next year. The OECD said constraints on Whitehall spending and higher-than-expected inflation played a part in the downgrade.

The report will likely challenge UK Chancellor Rachel Reeves, who faces tough questions next month about her record when she announces the government’s priorities for the next three years in a much-anticipated spending review. 

The Office of Budget Responsibility said in March, several weeks before Trump began to impose tariffs that the UK economy would grow by just 1% this year but rebound sharply to hit 1.9% next year. OECD chief economist Alvaro Pereira mentioned that he was cautious about the UK’s ability to withstand the uncertainty created by a global tariff war, which the OBR forecast could not consider.

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