OECD projects inflation to return to target in almost all major economies by end of next year

The global economy will “remain resilient” over the coming years but “risks and uncertainties are high”, according to the annual outlook from the Organisation for Economic Co-operation and Development.

The OECD, whose 38 members included the world's largest economies, forecasted growth of 3.2 per cent this year and 3.3 per cent next year, slightly higher than the predictions made in September. Meanwhile, inflation in the OECD countries is expected to ease further, from 5.4 per cent this year to 3.8 per cent next year and 3 per cent in 2026. Headline inflation has already returned to the targets set by the central bank targets in about half of advanced economies and close to 60 per cent of emerging market economies, the OECD said.

“The global economy has proved resilient. Inflation has declined further towards central bank targets, while growth has remained stable,” OECD secretary general Mathias Cormann said. “Significant challenges remain. Geopolitical tensions pose short-term risks, public debt ratios are high and medium-term growth prospects are too weak. Policy action needs to safeguard macroeconomic stability – through monetary policy easing that is carefully calibrated to ensure inflationary pressures are durably contained and through fiscal policy that rebuilds fiscal space to preserve room to meet future spending pressures.”

Although the Paris-based organisation's 267-page report did not mention president-elect Donald Trump by name, it alluded to Mr Trump's recent threats to impose tariffs of one sort or another on almost all goods entering the US by cautioning that “greater trade protectionism, particularly from the largest economies” constitutes a “downside risk”.

“Robust overall performance masks significant differences across regions and countries and is surrounded by important downside risks and uncertainties,” said OECD chief economist Alvaro Pereira. “There are increasing risks related to rising trade tensions and protectionism, a possible escalation of geopolitical conflicts, and challenging fiscal policies in some countries.”

UK boost, but more tax raises

As far as the UK is concerned, the OECD predicted inflation and growth would be slightly higher for the British economy than was previously forecast, because of a spending boost in Chancellor Rachel Reeves's budget in October. Ms Reeves set out plans for almost £70 billion a year of extra public spending, funded through tax rises and increased borrowing. That partly prompted the OECD to increase its UK inflation forecast for 2025 from 2.4 per cent to 2.7 per cent. As such, the OECD forecast that interest rates would fall to 3.5 per cent by the start of 2026, from their current 4.75 per cent. In turn, the prediction for the UK economy was an expansion of 1.7 per cent next year (up from the 1.2 per cent forecast in September), but a slowing to 1.3 per cent in 2026, as the front-loaded government spending runs its course.

“Growth is our number one priority, and the OECD upgrade will mean the UK is the fastest growing European economy in the G7 over the next three years,” Ms Reeves said in response to the OECD report. “That is only the start. Growth only matters if it's matched by more money in people's pockets.”

However, the OECD pointed out that Ms Reeves would still need to raise taxes in one shape or another. “Rebuilding fiscal buffers and continuing to mobilise additional revenue, including by closing loopholes and reducing distortions in the tax system, is necessary to ensure fiscal sustainability,” the report said. The OECD's tax-raising prediction for the UK comes just a week after Mr Reeves said she was “not coming back with more borrowing or more taxes”.

German woes

Meanwhile, the OECD trimmed its 2025 economic forecasts for Germany, due to political uncertainty and tight fiscal policy, while predicting a degree of stagnation for this year. The world's third-largest economy is expected to grow by 0.7 per cent in 2025, down from a previously forecast 1.1 per cent, the OECD said. “In 2025, Germany will bring up the rear among OECD countries,” the OECD's Isabell Koske said.

Germany's economy, the world's third largest, is having to cope with the collapse of the ruling coalition last month and the possibility of a tit-for-tat trade war with the US once Mr Trump takes up residence in the White House. Germany's economically important automotive sector has been hit by weak global demand and significant competition from China, and recovery in exports is expected to be slow. Meanwhile, France saw a 0.3 percentage point cut to its 2025 growth forecast to 0.9 per cent as the OECD released its report on the same day Prime Minister Michel Barnier’s government faced a no-confidence vote after a stand-off over its plans for public finances.

The OECD was more upbeat about the prospects for the world's largest economy, the US, raising its growth forecast for 2024 from 2.6 per cent to 2.8 per cent, and for 2025 from 1.6 per cent to 2.4 per cent. Meanwhile, the OECD sees the Federal Reserve cutting interest rates to 3.25-3.5 per cent by the first quarter of 2026.

The OECD said China's economy is now expected to expand by 4.7 per cent in 2025, a 0.2 per cent increase, while India's growth forecast was raised 0.1 percentage points to 6.9 per cent.