Global Economic Growth to Slow to 2.9% in 2025 as Trade Tensions Resurface

OECD forecasts subdued global expansion amid rising U.S. protectionism, inflationary stickiness, and fiscal uncertainty

The global economy is entering a slower growth phase, with the Organisation for Economic Co-operation and Development (OECD) forecasting a full-year expansion of just 2.9% in both 2025 and 2026, down from 3.3% in 2024. The Paris-based institution attributes the weaker outlook to mounting global uncertainty, primarily driven by a sharp pivot in U.S. trade policy under President Trump’s second term, and a recalibration of global supply chains.

In its latest economic outlook, the OECD notes that while inflation is easing and commodity prices have softened, these positive developments are being overshadowed by the resurgence of protectionism, labor market constraints, and fiscal imbalances across major economies. The expected deceleration puts global GDP growth below its long-term average and raises concern over the medium-term trajectory of job creation, investment, and real income growth.

U.S. Retrenchment and Domestic Shocks Drive Global Repercussions

The United States—the world’s largest economy—is at the center of the projected slowdown. After expanding by 3.3% in 2024, the U.S. economy is forecast to grow by just 1.6% in 2025. The OECD attributes this deceleration to a combination of heightened tariffs on imports, reductions in immigration inflows, and job cuts in government sectors, particularly at the federal administrative level.

“These policies, while aiming to rebalance trade and reduce public expenditure, are dampening aggregate demand and raising input costs,” the OECD report notes. The reintroduction of broad-based tariffs on Chinese and European goods has already triggered retaliatory measures, pushing up cross-border transaction costs and suppressing trade flows. The U.S.–Mexico–Canada Agreement (USMCA) framework has also come under strain, with Mexico and Canada both projected to experience growth slowdowns as supply chains weaken and demand from the U.S. softens.

Canada’s growth forecast has been revised downward to 1.2%, while Mexico is now expected to grow at 1.6% in 2025, both significantly below 2024 levels. According to the OECD, “North American regional integration is facing its most serious stress test since the 2008 crisis.”

Inflation: Easing, but Uneven

While headline inflation has retreated from the highs of 2022–2023, service-sector inflation remains stubbornly elevated. In the U.S. and parts of the Eurozone, prices for services such as health care, education, and hospitality are rising at over 4% annually, outpacing wage growth and eroding household purchasing power.

The OECD underscores that rising trade costs, particularly in countries with newly imposed tariffs, are likely to exert fresh inflationary pressure—especially on intermediate goods and key inputs. However, these effects are partially offset by declining global commodity prices, driven by subdued demand from China and improved supply conditions in energy and food markets.

The report cautions that if inflationary stickiness persists in services, it could delay central banks’ ability to normalize interest rates and reinvigorate investment.

Asia, Energy Prices, and Resilience in Emerging Markets

Not all regions are expected to be equally affected. Asia’s developing economies, particularly India, Indonesia, and Vietnam, are forecast to maintain relatively robust momentum due to strong domestic consumption and infrastructure-led stimulus. India, for example, is projected to grow at 6.1% in 2025, supported by manufacturing incentives, export diversification, and clean energy investments.

Commodity-exporting nations may see mixed results. The softening in oil and natural gas prices, while relieving global inflation, also poses downside risks to exporters such as Saudi Arabia, Nigeria, and Australia. On the other hand, green energy transitions, especially in emerging markets, have attracted record investment flows. The OECD highlights $14.6 billion in renewable energy FDI into India alone in FY2024–25—a 42% increase year-over-year.

Fiscal Stress and Policy Risks

Government spending is under renewed scrutiny. The OECD warns that rising defense expenditures, particularly in the U.S., Eastern Europe, and East Asia, are straining public finances. As interest payments on debt increase, the fiscal space for productive investment in education, health, and infrastructure shrinks.

The organization emphasizes the need for “prudent fiscal management”, especially in high-debt economies. The U.S., with a debt-to-GDP ratio climbing to 128%, may face credit rating risks if long-term consolidation measures are not introduced.

While monetary policy globally is entering a more dovish phase, with the European Central Bank hinting at a September rate cut, the OECD argues that structural reforms, particularly around labor mobility, digitization, and competition policy, will be crucial to lift potential output over the medium term.

Conclusion

The world economy is not on the brink of recession, but the path ahead is more fragile than it was a year ago. Trade fragmentation, inflation asymmetries, and policy divergence are reshaping the global economic order. While some emerging economies appear poised to defy the slowdown, advanced economies—particularly the U.S. and its closest trading partners—face the challenge of navigating protectionism without stifling growth.

As the OECD concludes, “The global outlook remains positive but precarious. It is not enough to avoid crisis; the goal must be to reignite shared growth under conditions of openness and discipline.”