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

The OECD upgraded its 2025 global growth forecast to 3.2%, noting current resilience is supported by AI investment and fiscal measures, but warned that the full impact of U.S. tariffs, now at 19.5% and the highest since 1933, is still unfolding and will likely weigh on future investment and trade as inventory buffers diminish. This outlook suggests most major central banks will likely ease monetary policy, with the exception of Japan, as inflation pressures are expected to continue subsiding.

Analysis

The Organisation for Economic Cooperation and Development (OECD) has upgraded its 2025 global growth forecast to 3.2%, a notable revision from its previous 2.9% estimate, reflecting unexpected near-term economic resilience. This strength is primarily attributed to an artificial intelligence investment boom supporting U.S. activity and significant fiscal measures cushioning China's slowdown. However, the report carries a cautious tone, warning that the full impact of U.S. import tariffs—which have reached an effective rate of 19.5%, the highest since 1933—is yet to be felt. The current stability has been partially sustained by firms absorbing costs through narrower margins and depleting inventory buffers that were built up prior to the tariff hikes. As these buffers fade, the OECD anticipates a drag on future investment and trade, keeping its 2026 global growth forecast at a more subdued 2.9%. Regionally, U.S. growth is projected to slow from 2.8% to 1.8% in 2025, while China's growth is expected to decelerate from a revised-up 4.9% this year to 4.4% in 2026. The Eurozone faces a mixed outlook, with German public spending providing a lift that is partially offset by fiscal tightening in France and Italy. A key implication is the expectation of monetary policy loosening from most major central banks, including the Federal Reserve, contingent on continued inflation moderation, though the OECD notes that tariff-induced price pressures could complicate this trajectory. Japan remains an outlier, with its central bank expected to continue tightening.

Key Decisions for Investors

• Consider rotating into sectors benefiting from near-term tailwinds, such as artificial intelligence, while exercising caution with investments highly exposed to global trade and supply chain disruptions given the delayed impact of U.S. tariffs.
• Monitor the growing divergence in monetary policy, particularly the dovish stance of the Fed versus the tightening in Japan, as this could present strategic opportunities in currency markets and global fixed-income allocations.
• Re-evaluate regional equity exposures based on the OECD's revised forecasts, potentially favoring markets with near-term upward revisions like Japan and China, while remaining selective within the Eurozone due to contrasting fiscal policies among its member states.
• Investors should watch for signs that higher tariffs are translating into broader inflation, as this could force the Federal Reserve to delay or reverse its anticipated rate cuts, altering the outlook for U.S. equities and bonds.