U.S. economic growth is expected to dip dramatically over the next two years, with real gross domestic product (GDP) growth falling from 2.8% in 2024 to 1.6% this year and 1.5% in 2026, according to the latest economic outlook report from the Organization for Economic Cooperation and Development (OECD).
The report from the Paris-based intergovernmental organization said the dour projection for the world’s largest economy “reflects the substantial increase in the effective tariff rate on imports and retaliation from some trading partners, high economic policy uncertainty, a significant slowdown in net immigration and a sizeable reduction in the federal workforce.”
The OECD report noted that the Trump administration’s trade war with China has resulted in about a 30% increase in the effective tariff rate on Chinese imports since the start of the year. Meanwhile, tariffs on goods from other trading partners have raised the overall average effective tariff rate from 2.5% to more than 15%. The OECD called it an “unprecedented increase” that has created the highest tariff rate on U.S. imports since World War II.
Annual headline inflation is expected to increase to 3.9% by the end of 2025, though the OECD sees U.S. inflation easing throughout 2026 due to moderate GDP growth and higher unemployment.
Those projections are close to predictions made by Federal Reserve Governor Christopher Waller during a speech in South Korea this week, in which he forecast that the effective tariff rate will end up around 15% by year-end, likely resulting in an inflation rate between 3% and 4% depending on the degree of tariff impacts absorbed by businesses.
The economic downturn won’t be confined to U.S. soil, according to the OECD, which forecasts that global economic growth will decline from 3.3% in 2024 to a 2.9% rate in 2025 and 2026.
“Weakened economic prospects will be felt around the world, with almost no exception,” the report stated. “Lower growth and less trade will hit incomes and slow job growth.”
Economic growth in Canada is projected to weaken from 1.5% in 2024 to 1% in 2025 and 1.1% in 2026. Mexico’s real GDP growth is expected to dip from 1.5% in 2024 to 0.4% next year and 1.1% in 2026.
The OECD predicts that China, the Trump administration’s chief adversary in its trade disputes, will see smaller year-over-year economic declines than the U.S. The group projects that China’s GDP growth rate will fall from 5% in 2024 to 4.7% in 2025 and 4.3% the following year.
In an outlier, India is expected to see real GDP growth rise from 6.2% in 2024 to 6.3% in its fiscal year 2025-26 and 6.4% the following fiscal year. The OECD believes moderate inflation, recent tax cuts and a strengthening labor market will help offset the impacts of U.S. tariffs on exports from India.
But the overall outlook for the global economy appears bleak for the near future, according to OECD Secretary-General Mathias Cormann.
“The global economy has shifted from a period of resilient growth and declining inflation to a more uncertain path,” Cormann said in a press release. “Our latest economic outlook shows that today’s policy uncertainty is weakening trade and investment, diminishing consumer and business confidence and curbing growth prospects.”
Cormann, the former finance minister of Australia, advocated for constructive trade talks over combative trade wars to stimulate global economic growth.
“Governments need to engage with each other to address any issues in the global trading system positively and constructively through dialogue — keeping markets open and preserving the economic benefits of rules-based global trade for competition, innovation, productivity, efficiency and ultimately growth,” Cormann said.
