U.S. and global growth forecast lifted by OECD as economies surprise to the upside

The OECD has upgraded its 2025 global economic growth forecast to 3.2% from 2.9%, attributing the resilience to factors such as robust AI-related investment in the US and fiscal support in China. However, the organization warns of significant risks, including the escalating impact of US tariffs, which reached an estimated 19.5% by August—the highest since 1933—and are increasingly visible in economic indicators. While G20 inflation forecasts for 2025 were marginally lowered to 3.4%, concerns persist regarding softening labor markets, potential re-inflation, fiscal vulnerabilities, and financial market repricing, though accelerated AI adoption presents a potential upside.

Analysis

The Organisation for Economic Co-operation and Development (OECD) has revised its 2025 global growth forecast upward to 3.2% from 2.9%, citing unexpected resilience in the first half of the year, particularly in emerging-market economies. This strength was attributed to strong AI-related investment in the United States and fiscal support in China, which offset trade and property market headwinds. The U.S. growth forecast for 2025 was also lifted to 1.8%, though this represents a significant deceleration from 2.8% growth in 2024. Despite the near-term upgrade, the outlook is tempered by significant risks, primarily from escalating U.S. tariffs. The OECD notes the effective U.S. tariff rate reached an estimated 19.5% in August, the highest since 1933, with the full economic impact on spending, labor, and prices yet to be felt. On the inflation front, the outlook has improved, with the G20 headline inflation forecast for 2025 lowered to 3.4% and the U.S. forecast revised down sharply to 2.7%. However, the report cautions that labor markets are softening and the disinflation process appears to have flattened, flagging further tariff hikes and a return of inflationary pressures as key risks alongside fiscal vulnerabilities and potential financial market repricing.

Key Decisions for Investors

• Given the upgraded 2025 growth outlook driven by AI, investors should consider maintaining exposure to the US technology sector, but hedge against the significant risk of margin compression from the escalating US tariff regime, which is now at its highest since 1933.
• The downward revision of the US inflation forecast to 2.7% could provide a tailwind for fixed-income assets and rate-sensitive equities, but it is prudent to monitor for signs of re-inflation, which the OECD flags as a key risk that could trigger market volatility.
• Actively screen portfolios for companies with high revenue concentration in global trade and US imports, as they are most vulnerable to the yet-to-be-fully-realized effects of tariff increases on spending, labor markets, and pricing power.