US growth forecasts cut by OECD due to tariffs, policy uncertainty and reduced immigration

The OECD has significantly cut its US GDP growth forecasts to 1.6% in 2025 and 1.5% in 2026, citing President Trump's tariff policies, high policy uncertainty, and reduced immigration; this is down from 2.8% growth last year and below previous forecasts. Inflation is expected to peak at 3.9% by the end of 2025, with unemployment rising to 4.4% by early 2026, while the budget deficit is projected to exceed 8% of GDP by 2026. The OECD recommends resolving trade tensions and implementing consistent policies to bolster business confidence.

Analysis

The Organisation for Economic Co-operation and Development (OECD) has materially revised its US economic growth forecasts downwards, projecting GDP growth of 1.6% in 2025 and 1.5% in 2026. This represents a significant deceleration from the 2.8% growth observed in the prior year and is notably below the OECD's March forecasts of 2.2% for 2025 and 1.6% for 2026. The downgrade is primarily attributed to the impact of Donald Trump's tariff regime, heightened policy uncertainty, reduced immigration, and a contraction in the federal workforce. The OECD highlights that risks to this outlook are tilted to the downside, citing potential for further weakening in consumption and investment, elevated financial market volatility, and the risk of inflation becoming entrenched. US inflation is anticipated to peak at 3.9% by the end of 2025, driven by higher import prices, before moderating in 2026. Concurrently, the unemployment rate is projected to climb to 4.4% by early 2026. Fiscal concerns are also prominent, with the budget deficit forecast to exceed 8.00% of GDP by 2026 and net debt expected to surpass 100% of GDP. The Federal Reserve's monetary policy is anticipated to remain unchanged throughout 2025, with potential interest rate reductions of up to 100 basis points forecasted for 2026. The OECD underscores the necessity of resolving international trade tensions and establishing clear, consistent policymaking to bolster business confidence and investment.

Key Decisions for Investors

• Investors should brace for a period of constrained US economic growth and potentially increased market volatility, factoring in the adverse impacts of current tariff policies and prevailing policy uncertainty.
• Closely monitor key macroeconomic indicators including inflation trends, unemployment data, and developments in US trade policy, as these will be critical drivers of market sentiment and Federal Reserve actions.
• Re-evaluate portfolio allocations considering the projected fiscal deterioration, including a budget deficit exceeding 8% of GDP and net debt surpassing 100% of GDP, which could influence sovereign risk perception and currency markets.
• Anticipate the Federal Reserve maintaining current interest rates through 2025, but prepare for potential easing in 2026, which could present tactical opportunities in interest-rate sensitive assets if inflation and growth outlooks align with projections.