The global economy has demonstrated resilience in 2023, but significant vulnerabilities remain, as outlined in the OECD’s latest Economic Outlook. The report anticipates a slowdown in global growth, projecting a decline from 3.2% in 2025 to 2.9% in 2026, before experiencing a slight recovery to 3.1% in 2027.
In the United States, growth is expected to decrease from 2.0% in 2025 to 1.7% in 2026, followed by a modest rise to 1.9% in 2027. The euro area is forecasted to see growth rates of 1.3% in 2025, 1.2% in 2026, and 1.4% in 2027. China’s economy is projected to grow at 5.0% in 2025, easing to 4.4% in 2026 and 4.3% in 2027.
Annual headline inflation across the G20 economies is expected to moderate from 3.4% this year to 2.9% in 2026 and 2.5% in 2027. By mid-2027, inflation is likely to return to target levels in most major economies.
Call for Fiscal Discipline and Structural Reforms
During the report’s presentation, OECD Secretary-General Mathias Cormann emphasized the need for countries to enhance their efforts in engaging in constructive dialogue. “Given the fragilities in the global economy, countries must reinforce their efforts to engage in constructive dialogue that ensures a lasting resolution to trade tensions and a reduction in policy uncertainty,” he stated.
The report highlights the importance of fiscal discipline to manage the increasing risks associated with high public debt and rising spending demands linked to defense needs and an aging population. Cormann further noted that structural reforms aimed at reducing red tape, simplifying regulations, and lowering entry barriers in service sectors are crucial for fostering competition, innovation, and improving living standards.
Supportive macroeconomic policies and improved financial conditions, driven by optimism surrounding new technologies and increasing AI-enabling investments, have helped sustain demand. These factors have provided some cushion against the challenges posed by elevated policy uncertainty and escalating trade barriers.
The effects of rising tariffs have yet to be fully realized but are becoming increasingly apparent in spending choices, business costs, and consumer prices, particularly in the United States. The second quarter of 2023 saw a moderation in global trade growth, with signs indicating weakening labor demand. Job openings have returned to pre-pandemic levels last seen in 2019.
Risks and Recommendations for Central Banks
The OECD Economic Outlook also identifies a range of risks that could exacerbate existing fragilities. These include potential further increases in trade barriers and lower-than-expected growth, particularly from net AI investments. Unexpected inflation spikes could also lead to widespread risk repricing in financial markets, especially given the current high valuations of assets and optimistic corporate earnings forecasts.
Central banks are advised to remain vigilant and responsive to changes in the balance of risks associated with price stability. Provided that inflation expectations remain anchored, reductions in policy rates should continue in economies where inflation is expected to moderate or remain subdued.
The heightened volatility of crypto-assets and the increasing interconnectedness of non-bank financial institutions with traditional banking systems present additional financial stability concerns. To mitigate these risks, maintaining fiscal discipline is essential for ensuring long-term debt sustainability and the capacity to respond to future economic shocks.
Overall, prioritizing spending and tax policies that bolster sustainable economic growth while offering support to those most in need will be crucial for navigating these challenges effectively.
