The Organisation for Economic Co-operation and Development (OECD) has revised its global and eurozone growth forecasts for 2025, citing weak investment, rising geopolitical risks, and escalating trade disruptions. The OECD now predicts a 3.1% global GDP expansion, down from its previous estimate of 3.3%. For the eurozone, the growth forecast has been reduced to 1.0%, down from 1.3% in December.
Eurozone Faces Weak Recovery Amid Geopolitical Uncertainty
The eurozone’s growth forecast for 2025 has been downgraded by 0.3 percentage points to just 1.0%. This reflects the persistent uncertainty and weak demand across the region, which continue to dampen economic prospects. Among the eurozone’s major economies, Germany, the largest, faces the largest cuts. Its growth forecast has been revised downward to 0.4% from the earlier 0.7%. Meanwhile, France and Italy are expected to grow at slower rates of 0.8% and 0.7%, respectively, while Spain remains a relative bright spot with a forecasted growth rate of 2.6%.
Weak Investment and High Borrowing Costs Limit Recovery
The OECD points to high borrowing costs and weak external demand as key factors limiting economic recovery in the eurozone. The effects of these factors are particularly apparent in Germany, where industrial output has been sluggish due to persistent uncertainty surrounding global trade and the impact of Russia’s invasion of Ukraine.
France and Italy have fared somewhat better, but both are facing structural issues that may hinder more robust growth in the near term. Spain, however, has shown some resilience with strong domestic consumption and robust exports expected to support its recovery in 2025, though growth is expected to slow slightly in 2026.
Rising Protectionism Threatens Global Growth
The OECD’s latest Economic Outlook highlights global trade tensions as a significant risk to growth. The report warns that increasing protectionism and rising trade barriers could reduce global GDP by 0.3% over the next three years. The trade disruptions, exacerbated by geopolitical tensions, have already led to supply chain challenges that continue to hurt global growth.
The report also highlights inflationary pressures that persist despite slowing demand. The OECD forecasts global inflation to remain higher than desired, with the eurozone expected to see inflation of 2.2% in 2025, easing only slightly to 2.0% in 2026. The UK faces a similar challenge, with inflation forecast at 2.7% in 2025, while the US is expected to see inflation at 2.8%.
North America Faces Economic Contraction
North American economies have been hit particularly hard by recent trade disruptions. The OECD has downgraded Mexico’s 2025 GDP forecast by 2.5 percentage points, now predicting a contraction of 1.3%. Canada’s growth has also been revised downward, with the economy expected to grow at just 0.7% in 2025, a 1.3 percentage point reduction from earlier predictions.
The United States is expected to experience slower growth than initially forecast, with a revised GDP growth of 2.2%, a 0.2 percentage point drop from previous estimates. The OECD points out that Canada and Mexico, due to their dependence on US trade, will suffer the most severe consequences of ongoing trade restrictions.
Inflationary Pressures and Central Bank Responses
Despite signs of slowing demand, inflation remains a significant issue across many economies. The OECD expects eurozone inflation to moderate to 2.2% in 2025, with a slight easing to 2.0% in 2026. However, inflation in services remains stubbornly high, while goods inflation, which had been weak, is now starting to rise.
The UK faces a prolonged battle with inflation, with the OECD projecting inflation to average 2.7% in 2025. In the US, inflation is expected to remain above central bank targets, reaching 2.8% in 2025.
Given these persistent inflationary pressures, central banks are expected to proceed with caution in their rate cut policies. The European Central Bank (ECB) is anticipated to reduce interest rates gradually, bringing the key policy rate to 2% by late 2025. The Bank of England is also expected to cut rates slowly, while the US Federal Reserve is likely to hold rates steady until at least 2026.
Urgency for Global Cooperation and Structural Reforms
The OECD’s report stresses the need for increased global cooperation to avoid further fragmentation of the global economy. The organization calls on nations to work together to strengthen supply chains and reduce trade barriers, which would benefit living standards worldwide.
Additionally, the OECD emphasizes the need for structural reforms to boost long-term growth, particularly in Europe. The organization encourages investments in digital infrastructure, productivity improvements, and regulatory simplifications. Artificial intelligence, the OECD argues, has the potential to significantly boost productivity if adopted more rapidly across economies.
As the world faces continued economic challenges, the OECD’s report highlights the fragility of the global recovery. While economies have shown resilience in the face of adversity, significant risks remain. The OECD warns that countries must act swiftly and in concert to stabilize the global economy and avoid further disruption to international trade and growth.
