The global economy has proven “resilient” this year, despite concerns about a sharper slowdown in the wake of higher trade barriers and significant policy uncertainty, according to OECD Secretary-General Mathias Cormann, commenting on the latest Economic Outlook report. However, the report reveals a looming drag on global growth, driven primarily by escalating trade friction and the cost pass-through of new tariff regimes. While activity has been held up by the front-loading of production and trade, and strong AI-related investment, the outlook remains fundamentally “fragile”, Cormann said.
The OECD projections anticipate a global GDP growth moderation.
Global growth is expected to slow from 3.2% in 2025 to 2.9% in 2026, before picking up slightly to 3.1% in 2027.
This softening is expected to begin during the second half of this year as “front-loading activity further unwinds” and the full effects of global trade protectionism take hold. The report warns that as “higher effective tariff rates on imports to the United States and China pass-through further into business costs and final goods prices” both investment and trade growth will be dampened globally. Furthermore, persistently “elevated geopolitical and policy uncertainty will also continue to weigh on domestic demand in many economies”, the report said.
The near-term growth projections are noted as stronger than those released in the June 2025 Economic Outlook, reflecting factors such as easier global financial conditions and more supportive macroeconomic policies. Monetary policy, in particular, offers a counterweight, with policy interest rates “continuing to be lowered in many countries”. This, alongside supportive fiscal measures in China, India, and Indonesia, helps to explain the near-term resilience. The global growth recovery expected through 2026 is similarly anticipated to be “helped by the fading impact of higher tariff rates, favourable financial conditions, supportive macroeconomic policies and lower inflation”. Nevertheless, this recovery is heavily reliant on emerging-market economies in Asia, which are projected to “continue to account for the majority of global growth”.
Global trade dynamics
The report highlights a significant deceleration in global trade growth.
Trade growth for 2025 is now expected at 4.2%, inflated by the stronger-than-expected front-loading observed in the first half of the year.
However, this growth is projected to moderate sharply to just 2.3% in 2026, as the “full effects of higher tariffs are felt”, before a modest recovery to 2.8% in 2027.
Crucially, the composition of global trade is shifting away from its pre-pandemic structure. The OECD notes that emerging-market economies are accounting for a larger share of trade, even as all regions experience slower growth. “The share of trade accounted for by the South-East Asian economies is expected to rise in 2026-27”, positioning this region as an increasingly vital node in global supply chains. Conversely, the contribution to global trade growth from advanced economies is expected to decline, “especially that of Europe and the North American economies”, an indication of the costs of protectionism. The contribution of China is also projected to “weaken slightly, as trade growth slows”.
The trade headwinds are visible in individual regional outlooks. In the US, growth is expected to slow as “the effects of substantially higher effective tariff rates on imports” are fully felt. For China, the lowering of growth is attributed to the “unwinding of front-loading of exports”, the “imposition of higher tariff rates on exports to the United States”, and the continuing adjustment in the real estate sector. Even trade powerhouses like Japan will see a drag, where expansionary fiscal policy and business investment will be “somewhat offset by subdued external demand amid new trade restrictions and elevated trade policy uncertainty”. Similarly, the strong growth anticipated in India will be partially weakened by “higher tariff rates on many exports to the United States,” which will undermine export momentum.
Inflationary tariff transmission
The increase in tariffs is not only an issue of trade volume; it is also an inflationary pressure point.
The report forecasts that in the US, inflation is expected to rise further over the next several quarters as “tariff increases further pass through to final goods prices, peaking in mid-2026”, before slowly moderating. Across the G20 countries, while inflation projections have been revised downwards overall, the anticipated moderation is predicated on the general inflationary impact from higher trade costs being “generally offset by softer growth”.
Cormann gives advice for policymakers grappling with this outlook. He stressed that the outlook “remains fragile” and that “a further rise in trade barriers, especially around critical inputs, could inflict significant damage on supply chains and global output”. The solution lies in multilateral engagement. “Constructive dialogue between countries is central to ensure a lasting resolution to trade tensions and improve the economic outlook,” he said. “All other things being equal, well-functioning open global markets mean better living standards and stronger growth,” and they “should engage productively with one another to make international trading arrangements fairer and function better, in a way that preserves the economic benefits of open markets and rules-based global trade”.
Beyond dialogue, the report advocates for domestic discipline and reform. Cormann stressed the need for “fiscal discipline… to tackle high and rising public debt”, and for governments to “advance structural reforms and optimise public finances, in order to durably strengthen growth prospects and living standards”. Specifically, “structural reforms that reduce red tape, simplify regulations and lower entry barriers in service sectors are key to enhance competition, innovation and business dynamism, and ultimately durably strengthen living standards”.
While the global economy is heading into a period of moderated growth, the dampening effect of tariffs acting as a primary headwind. Monetary easing and Asian dynamism may provide temporary support, but the long-term outlook – and the stability of global commerce – hinges on whether governments heed the OECD’s call to replace the weaponisation of tariffs with “constructive dialogue that ensures a lasting resolution to trade tensions”. Source: Baltic Exchange
