Geopolitical and policy uncertainty, plus further trade fragmentation, could harm global growth, the Organisation for Economic Co-operation and Development (OECD) warns.

The Paris-based institution said Monday that Donald Trump’s trade wars are “clouding the outlook” for worldwide economic growth.

“The global economy has shown some real resilience, with growth remaining steady and inflation moving downwards. However, some signs of weakness have emerged, driven by heightened policy uncertainty,” explains OECD secretary general Mathias Cormann. “Increasing trade restrictions will contribute to higher costs both for production and consumption. It remains essential to ensure a well-functioning, rules-based international trading system and to keep markets open.”

In its Interim Economic Outlook, the OECD estimates that global gross domestic product (GDP) growth should lower from 3.2% in 2024 to 3.1% in 2025 and 3% in 2026. The previous project was for a 3.3% global GDP growth over the next two years.

With more trade barriers and higher-than-anticipated inflation, annual real GDP growth in the US is projected to “slow from its very strong recent pace” to 2.2% in 2025 and 1.6% in 2026. GDP growth will also slow in the Euro area to 1% in 2025 and 1.2% in 2026. Prospects in China will also soften in 2026 to 4.4% from 4.8% this year, Kallanish learns. 

India, however, is set to continue growing to 6.4% this year and 6.6% in 2025. Indonesia will see the second-largest GDP growth rate at 4.9% and 5%, respectively. Argentina and Germany, meanwhile, will see their GDP shrink by 0.2% and 1.8%, respectively.

Among several identified risks, the outlook highlights the escalation of trade restrictive measures. If bilateral tariffs were raised further on all non-commodity US imports, and countries retaliated with their tariffs, the global output could fall by around 0.3% by the third year, and global inflation could rise by 0.4 percentage points per year on average in the first three years.

“The impact of these shocks would be magnified if policy uncertainty were to increase further or there was widespread risk repricing in financial markets. These would add to the downward pressures on corporate and household spending around the world,” the OECD adds.

To reduce output weakening in advanced and emerging economies, the institution recommends “ambitious structural reforms.” It says governments must enact reforms to improve productivity and enhance the adoption of new technologies by boosting market competition and eliminating excessive regulatory burdens on firms.

“Enhancing education and skills development and reducing constraints in labour and product markets that impede investment and labour mobility will be key. Artificial intelligence (AI) presents a unique opportunity to revive productivity,” it adds.