Full impact of US tariff shock yet to come as growth holds up, OECD says

In its latest Economic Outlook Interim Report, the Organisation for Economic Cooperation and Development said the full impact of U.S. tariff hikes was still unfolding, with firms so far absorbing much of the shock through narrower margins and inventory buffers.

Many firms stockpiled goods ahead of the Trump administration's tariff hikes, which lifted the effective U.S. rate on merchandise imports to an estimated 19.5% by end-August — the highest since 1933, in the depths of the Great Depression.

"The full effects of these tariffs will become clearer as firms run down the inventories that were built up in response to tariff announcements and as the higher tariff rates continue to be implemented," OECD head Mathias Cormann told a news conference.

OECD'S 2025 GROWTH FORECASTS UPGRADED

Global economic growth is now expected to slow only slightly — to 3.2% in 2025 from 3.3% last year — compared to the 2.9% the OECD had forecast in June.

However, the Paris-based organisation kept its 2026 forecast at 2.9%, with the boost from inventory building already fading and higher tariffs expected to weigh on investment and trade growth.

"Additional increases in barriers to trade or prolonged policy uncertainty could lower growth by raising production costs and weighing on investment and consumption," Cormann said.

The OECD forecast U.S. economic growth would slow to 1.8% in 2025 — up from the 1.6% it forecast in June — from 2.8% last year before easing to 1.5% in 2026, unchanged from the previous forecast.

An AI investment boom, fiscal support and interest rate cuts by the Federal Reserve are expected to help offset the impact of the higher tariffs, a drop in net immigration and federal job cuts, the OECD said.

In China, growth was also seen slowing in the second half of the year as the rush to ship exports before the U.S. tariffs recedes and fiscal support wanes.

Nonetheless, China's economy is expected to grow 4.9% this year - up from 4.7% in June - before slowing to 4.4% in 2026 - revised up from 4.3%.

In the euro zone, trade and geopolitical tensions were seen offsetting the boost from lower interest rates, the OECD said.

The bloc's economy was seen growing 1.2% this year - revised up from 1.0% previously - and 1.0% in 2026 - down from 1.2% - as increased public spending in Germany lifts growth while belt-tightening weighs on France and Italy.

Japan's economy is expected to benefit this year from strong corporate earnings and a rebound in investment, lifting growth to 1.1% - up from 0.7% - before momentum fades and the expansion slows to 0.5% in 2026, revised up from 0.4%.

The OECD revised its growth forecast for Britain up to 1.4% this year from 1.3%, and kept its 2026 forecast unchanged at 1.0%.

MONETARY POLICY EXPECTED TO BE LOOSE

With growth slowing, the OECD said it expects most major central banks to lower borrowing costs or keep policy loose over the coming year, as long as inflation pressures continue to ease.

It projected the U.S. Federal Reserve would cut rates further as the labour market weakens — unless higher tariffs trigger broader inflation.

Australia, Britain and Canada are expected to see gradual rate cuts, while the European Central Bank is seen holding steady with inflation near its 2% target.

Japan, however, is expected to raise rates as it continues its slow withdrawal from ultra-loose monetary policy.