Global Economic Growth Exceeds Expectations but US Tariffs Loom

Global Economic Resilience Amidst Headwinds

The global economy has shown remarkable resilience in the face of a series of challenges, including persistent inflation and geopolitical tensions. However, the Organisation for Economic Co-operation and Development (OECD) has warned that risks remain, particularly regarding the full impact of US import tariffs.

AI Supports US Economy, but Tariffs Cast a Shadow

The latest OECD Economic Outlook Interim Report indicates that investment in artificial intelligence (AI) is currently supporting economic activity in the United States. However, the full impact of US import tariffs has yet to materialize, as companies have so far absorbed the shock by reducing profit margins and drawing on inventories.

In fact, the average effective tariff rate on goods imported into the US rose to 19.5% by the end of August – the highest level since the Great Depression in 1933. This was partly due to companies stockpiling goods ahead of tariff implementation during the Trump administration.

“As firms run down inventories accumulated to cope with tariffs and higher tariffs continue to be implemented, the full impact of these measures will become clearer,” said OECD Secretary-General Mathias Cormann in a press conference.

Global Growth Forecast for 2025 Raised, but Risks Intensify in 2026

The OECD has raised its forecast for global economic growth in 2025 from 2.9% in its June forecast to 3.2%. However, the organization kept its forecast for 2026 unchanged at 2.9%. This is because the short-term boost from inventory accumulation is fading, and higher tariffs are expected to slow investment and trade growth.

“Further increases in trade barriers or prolonged policy uncertainty could slow growth by raising production costs and discouraging investment and consumption,” Cormann warned.

A Look at Major Economies

• United States: Economic growth is projected to slow from 2.8% last year to 1.8% in 2025 (up from the June forecast of 1.6%) and fall to 1.5% in 2026. A surge in AI investment, fiscal support, and Federal Reserve interest rate cuts are expected to partially offset the impact of higher tariffs, reduced immigration, and federal layoffs.
• Euro Area: The growth forecast for 2025 has been raised to 1.2%, but it could fall back to 1.0% in 2026. Increased public spending in Germany is boosting growth, while fiscal tightening in France and Italy is acting as a drag.
• Japan: Growth is projected to rise to 1.1% in 2025, driven by strong corporate earnings and an investment rebound, but will slow to 0.5% in 2026.
• United Kingdom: The growth forecast for 2025 has been raised to 1.4%, and remains unchanged at 1.0% for 2026.

Monetary Policy Easing Remains the Mainstream

The OECD expects most major central banks to cut interest rates or maintain accommodative policies in the coming year, assuming inflationary pressures continue to ease.

• Federal Reserve: Could cut interest rates further if the labor market weakens, unless higher tariffs trigger broader inflation. Markets currently expect a 90% probability of a 25 basis point rate cut in October and a 75% probability of a similar cut in December.
• Reserve Bank of Australia, Bank of England and Bank of Canada: Are expected to gradually cut interest rates.
• European Central Bank: Is expected to keep interest rates unchanged as inflation approaches its 2% target.
• Bank of Japan: Will gradually exit its ultra-loose policies.

The Interplay of Geopolitics and Economic Forecasts

Beyond tariffs, various geopolitical factors, such as the war in Ukraine and tensions in other regions, introduce significant uncertainty into economic forecasts. Supply chain disruptions stemming from these events can further exacerbate inflationary pressures and hinder trade, impacting growth projections across the globe. Businesses are increasingly factoring geopolitical risks into their long-term strategic planning, seeking to diversify supply chains and build resilience against unforeseen shocks.