World growth to slow amid trade turmoil, OECD warns

Collectively, the global economy is now set to grow by 2.9% this year and next, the OECD said in its quarterly report released Tuesday. That marks a downgrade to the group’s previous forecasts, which saw growth at 3.1% in 2025 and 3% in 2026, and suggests the world economy is set to slow from the 3.3% expansion it booked last year.

Further increases to trade barriers would damp global growth even more, the OECD warned, urging governments to strike trade deals to forestall an even sharper slowdown.

“Lower growth and less trade will hit incomes and slow job growth," the group said. President Trump’s tariff onslaught, a central plank of his second term in the White House, has ebbed and flowed amid legal challenges and continuing trade talks with countries around the world. But some new sector-specific tariffs have already been put in place, and the seesawing has generated a sharp rise in uncertainty, the OECD said.

The U.S. itself will be among the economies worst hit, the group said. The world’s largest economy is set to grow just 1.6% this year, a sharp deceleration from 2024’s 2.8% and lower than OECD’s previous forecast of 2.2% for the year, as a result of Trump’s tariffs, wider policy uncertainty, lower net immigration and cuts to federal workforces, the group said.

The American economy shrank in the first quarter of the year, partly as a result of a trade imbalance as companies rushed to stock up on imports ahead of the imposition of new tariffs. Mexico and Canada, which are particularly vulnerable to a hit to their trade with their common neighbor, will also see sharp slowdowns in growth this year, according to the forecasts. The Mexican economy will grow just 0.4%, while Canada’s economy will expand by 1.0%, the OECD expects.

But while North America is expected to lead the global deceleration, few parts of the world will escape the impact of the uncertainty caused by President Trump’s trade policy, the group said.

“Trade uncertainty is having a dampening impact on the rest of the world.," said Alvaro Pereira, chief economist at the Paris-based group, in an interview with The Wall Street Journal.

“All this uncertainty is not good for investment, it’s not good for growth," he said.

In response to those gloomier prospects, governments should strive to reach trade deals and cooperate more closely, Pereira said.

“The most important policy is for countries to get a deal… to reach agreements so that we are able to reduce trade barriers rather than raise them," he said. A broad reduction of 1.5 percentage points in global tariff rates could ensure a return to “significant" growth within a few years, as well as less inflation, Pereira said.

Alongside trade deals, governments should also work to bolster investment, the OECD said. In the average wealthy economy, investment is set to take a sustained hit in the current environment, similar to the damage dealt by previous global shocks such as the global financial crisis and the Covid-19 pandemic, Pereira said.

“We would not be surprised to see investment come down again," he said. “That’s why substantial policy support for housing investment, business investment, and public investment is key so that we can bring more investment to the table and more growth to the economy."

Pereira cautioned that higher government outlay–such as on defense, an area in which Europe in particular plans to spend much more over the coming years–must be accompanied by careful reviews of spending in order to avoid exacerbating already high debt levels and sparking a new surge in price inflation. For now, inflation in many parts of the world is coming under control, though price rises in services remain “stubbornly sticky," the OECD said.

Policymakers in some countries can as such reduce interest rates further in order to spur investment and growth, Pereira said. “In Europe, for example, if trade risks don’t get worse and inflation expectations stay anchored, there is room to continue lowering policy rates," he said. The European Central Bank is widely expected to continue on its recent path of cuts to its policy rate when its decision makers meet this week.

The U.S. Federal Reserve, by contrast, is more hemmed in by the impact of tariffs, Pereira said.

“With the recent spike in effective tariffs and the inflationary pressures associated with that, we expect inflation to reach around 4% by the end of this year," he said. So we’re not expecting policy-rate changes this year."

Write to Joshua Kirby at joshua.kirby@wsj.com