The OECD lifts U.S. growth outlook — but it's still a bleak forecast

The OECD slightly upgraded its U.S. GDP growth forecast for 2025 to 1.8% from 1.6%, still representing a significant deceleration from 2.8% in 2024, with further slowing to 1.5% projected for 2026. While minor revisions were also seen across other major economies, the organization cites strong AI-related investment and China's fiscal support as positive factors, yet warns of substantial downside risks from the full impact of tariffs, resurgent inflation, fiscal concerns, and potential financial market repricing.

Analysis

The Organization for Economic Cooperation and Development (OECD) has revised its U.S. GDP growth forecast for 2025 upward by two-tenths to 1.8%, yet this still signals a significant economic deceleration from the 2.8% growth recorded in 2024. The outlook remains cautious, with a further projected slowdown to 1.5% in 2026, which is notably below the Federal Reserve's 1.9% projection for that year. The OECD attributes the near-term resilience to strong AI-related investment and fiscal measures in key economies like China. However, the report underscores substantial downside risks, warning that the full impact of tariffs has yet to be felt and could negatively affect spending, labor markets, and prices. Other material risks cited include a potential resurgence of inflation, heightened fiscal pressures, and financial stability concerns stemming from volatile crypto-asset valuations. This cautious fundamental outlook contrasts sharply with current market sentiment, where the S&P 500 has reached record highs fueled by optimism over AI and anticipated Fed rate cuts, a sentiment also reflected in the 44 basis point drop in the 10-year Treasury yield this year.

Key Decisions for Investors

• Given the OECD's forecast of a decelerating U.S. economy and multiple downside risks, investors should consider adopting a more defensive posture and re-evaluating exposure to cyclically sensitive assets.
• While the broad economic outlook is cautious, the report identifies AI-related investment as a key growth driver, suggesting that targeted exposure to this theme remains a viable strategy, albeit one concentrated in an otherwise slowing economy.
• Closely monitor leading indicators for the primary risks identified, such as inflation data and developments in trade policy, as a negative turn in these areas could trigger the financial market repricing warned of by the OECD.
• The decline in Treasury yields is consistent with the slowing growth forecast, suggesting that maintaining or increasing allocation to long-duration fixed income could serve as a potential hedge against a sharper-than-expected economic downturn.