OECD says full brunt of U.S. tariff shock yet to come as growth holds up

The OECD has upgraded its 2025 global growth forecast to 3.2%, citing better-than-expected resilience, with AI investment bolstering U.S. activity and fiscal support cushioning China's slowdown. However, the organization warns that the full impact of U.S. import tariffs, now at 1933 levels, is yet to be felt as firms deplete inventory buffers, potentially weighing on future investment and trade growth in 2026. Consequently, most major central banks are anticipated to ease monetary policy in the coming year, contingent on continued inflation abatement, though Japan is expected to raise rates.

Analysis

The OECD's latest outlook presents a bifurcated global economic view, upgrading the 2025 growth forecast to 3.2% while simultaneously highlighting significant downstream risks. This near-term resilience is largely attributed to temporary or specific factors, notably an AI investment boom propping up U.S. activity and substantial fiscal support cushioning China's slowdown. However, the report cautions that the full impact of U.S. import tariffs, which have pushed the effective rate to 19.5%—a level unseen since 1933—has been masked by firms depleting inventories and absorbing costs through narrower margins. As these buffers are exhausted, the OECD anticipates a global growth slowdown to 2.9% in 2026. This outlook underpins expectations for dovish monetary policy, with most major central banks, including the Federal Reserve, projected to cut rates, contingent on easing inflation. This trend is contrasted by the European Central Bank, which is seen holding steady, and the Bank of Japan, which is expected to continue its policy normalization by raising rates.

Key Decisions for Investors

• Given that the upgraded 2025 growth forecast is supported by temporary drivers like an 'AI investment boom' and fiscal stimulus, investors could maintain exposure to related technology sectors while preparing for a 2026 slowdown by increasing focus on quality and defensive names.
• The stark monetary policy divergence, with most major central banks expected to ease while the Bank of Japan tightens, presents clear relative value opportunities in government bond and currency markets, notably a potential long JPY position against currencies with dovish central banks.
• It is critical to monitor corporate margins and inventory levels in sectors sensitive to trade, as the OECD explicitly warns the full negative impact of U.S. tariffs has been delayed rather than averted, posing a significant risk to future profitability.
• Consider underweighting exposure to the Eurozone relative to the U.S. and Japan for 2026, as the OECD downgrades its forecast for the bloc, citing headwinds from belt-tightening in France and Italy that offset stimulus in Germany.