The latest OECD Economic Outlook, Interim Report September 2025, paints a nuanced picture of the global economy, revealing that growth proved more resilient than anticipated in the first half of the year. However, this optimism is tempered by clear signals of an impending slowdown, with the report highlighting the growing impact of elevated tariffs and a leveling off of disinflationary pressures. This shift suggests a more challenging economic landscape ahead, requiring careful navigation from policymakers and investors alike.
Global Economy's Shifting Tides: What Happened and Why It Matters
The OECD's interim report, released in September 2025, provided a crucial update on the state of the world economy. It acknowledged a stronger-than-expected performance in the first half of 2025, largely attributed to robust AI-related investment, particularly in the United States, and significant fiscal support measures implemented in China. This initial resilience led the OECD to revise its global growth forecast for 2025 upward to 3.2%, a notable increase from the 2.9% projected in June. Despite this upward revision, the 2025 forecast still represents a slight moderation from the 3.3% growth recorded in 2024, with the projection for 2026 holding steady at 2.9%.
However, the report quickly pivots to caution, indicating that the global economy is now exhibiting clear signs of softening. Recent economic indicators suggest a moderation in activity during the latter half of 2025. A significant contributing factor to this anticipated slowdown is the fading effect of "front-loading" of trade, where companies accelerated exports in anticipation of future tariff increases. As these temporary boosts dissipate, and the full weight of higher tariffs begins to be felt, the economic environment is expected to become more challenging. The U.S. labor market, a bellwether for global economic health, is also showing initial signs of softening, further underscoring the shift in momentum.
The persistent and escalating impact of higher tariffs is a central theme of the report. The effective U.S. tariff rate on merchandise imports climbed to an estimated 19.5% by the end of August 2025, marking the highest rate observed since 1933. While businesses initially absorbed some of these costs through narrower profit margins and strategic inventory buffering, these mechanisms are unsustainable in the long term. The OECD warns that as these accumulated inventories are drawn down, and the higher tariffs become a permanent fixture, they are poised to exert significant downward pressure on global investment and trade growth. This will inevitably translate into visible impacts on consumer spending choices, labor markets, and ultimately, consumer prices.
Adding to the complexity is the leveling off of disinflationary trends. After a period of declining inflation, the pace has now stalled, and the risks to continued disinflation remain elevated. While headline inflation in G20 economies is projected to decrease from 3.4% in 2025 to 2.9% in 2026, core inflation in G20 advanced economies is expected to remain stubbornly stable at 2.6% in 2025 and 2.5% in 2026. This indicates that underlying price pressures are proving more persistent than previously hoped. The report specifically notes a slight increase in goods prices in some economies and continued stickiness in services inflation. Moreover, the tariff hikes in the United States are anticipated to further fuel inflationary pressures, potentially keeping annual inflation above target through 2026, posing a dilemma for central banks balancing growth and price stability.
Market Ripple Effects: Navigating a Period of Uncertainty
The OECD's interim report suggests a period of heightened uncertainty for financial markets, with potential winners and losers emerging from the shifting economic currents. Companies heavily reliant on international trade, particularly those with significant exposure to U.S. import and export markets, are likely to face increased headwinds. Manufacturers and retailers that have thus far absorbed tariff costs through reduced margins may see further erosion of profitability as these costs are passed on or as demand softens.
Conversely, domestic-focused companies in economies with robust internal demand might be relatively shielded from the direct impacts of trade friction. However, even these entities are not immune to the broader economic slowdown and potential inflationary pressures. Technology companies specializing in artificial intelligence, such as NVIDIA (NASDAQ: NVDA) and Google (NASDAQ: GOOGL), which have been driving significant investment, could continue to see strong demand, although even this sector might feel the pinch if overall economic activity decelerates sharply. Companies that can innovate to reduce reliance on international supply chains or those that offer essential services less sensitive to economic cycles may also fare better.
The leveling off of disinflation and the potential for tariffs to fuel inflation could lead to a more hawkish stance from central banks, even amidst signs of slowing growth. This could translate into higher interest rates for longer, impacting companies with high debt loads or those reliant on cheap financing for expansion. Sectors like real estate and highly leveraged industries could face increased pressure. Furthermore, currency markets could experience volatility as investors react to diverging economic outlooks and monetary policy trajectories across major economies. A stronger U.S. dollar, driven by persistent inflation and potential rate hikes, could make U.S. exports more expensive and further exacerbate trade imbalances.
Broader Implications: A New Era of Economic Nationalism?
The OECD's report underscores a concerning trend towards increased economic nationalism and protectionism, with higher tariffs acting as a significant impediment to global trade and investment. The escalation of the effective U.S. tariff rate to its highest level in decades signals a potential shift away from the multilateral trade framework that has underpinned global prosperity for decades. This not only directly impacts trade flows but also encourages companies to reconsider global supply chain strategies, potentially leading to reshoring or nearshoring efforts that could increase production costs and reduce efficiency.
The report's findings also highlight the delicate balance central banks face. The leveling off of disinflation, coupled with tariff-induced inflation, creates a stagflationary risk where policymakers must contend with both slowing growth and persistent price pressures. This complex environment could necessitate difficult choices, potentially prioritizing inflation containment over growth stimulation, which could have far-reaching consequences for employment and economic activity. The decline in net immigration and reduction in the federal government workforce in the U.S., cited as factors contributing to the 2026 slowdown, point to broader demographic and policy shifts that could constrain long-term growth potential.
Historically, periods of rising protectionism and trade wars have often preceded economic downturns. The current situation, with escalating tariffs and geopolitical tensions, draws parallels to the early 20th century. While the global economy is far more interconnected today, the risks of fragmentation and reduced international cooperation are real. This could stifle innovation, reduce competition, and ultimately lead to a less efficient allocation of global resources. Furthermore, the report's emphasis on AI-related investment as a driver of resilience suggests a growing divergence in economic performance between countries and sectors that are at the forefront of technological adoption and those that are lagging.
What to Pay Attention to Next: Navigating the Headwinds
Looking ahead, investors and policymakers should closely monitor several key indicators. The trajectory of global trade volumes will be a critical gauge of the tariffs' true impact. Any further escalation in trade tensions or retaliatory measures could quickly exacerbate the economic slowdown. Furthermore, inflation data, particularly core inflation figures, will be crucial in determining the monetary policy responses of major central banks. If inflation remains stubborn despite softening growth, central banks may be forced to maintain a tighter stance for longer, potentially leading to further market volatility and a more pronounced economic deceleration.
The performance of the U.S. labor market will also be a key determinant of economic health. Any sustained weakening in employment figures or a significant rise in unemployment could signal a more severe downturn than currently anticipated. Beyond macroeconomic data, market participants should pay close attention to corporate earnings reports, particularly from companies with significant international operations. These reports will provide real-time insights into how businesses are adapting to higher tariffs, supply chain disruptions, and shifting consumer demand.
Strategically, businesses may need to consider diversifying their supply chains, exploring new markets, and investing in automation and efficiency to mitigate the impact of rising costs and trade barriers. Governments, on the other hand, will face the challenge of designing fiscal and monetary policies that can support growth without reigniting inflationary pressures. The interplay between these factors will shape the economic landscape in the coming months and years, offering both challenges and opportunities for those who can adapt effectively.
Conclusion: A Delicate Balance and Enduring Vigilance
The OECD's September 2025 Interim Report serves as a vital wake-up call, highlighting a global economy at a crossroads. While the initial resilience in the first half of the year offered a brief respite, the emerging signs of softening growth, the escalating impact of higher tariffs, and the persistent challenge of disinflation paint a picture of increasing complexity. The revised U.S. GDP forecasts, showing a deceleration into 2026, underscore the tangible consequences of these multifaceted headwinds.
Moving forward, the market will likely be characterized by increased volatility and a need for heightened vigilance. Investors should prioritize companies with strong balance sheets, diversified revenue streams, and a proven ability to adapt to changing economic conditions. Sectors poised to benefit from continued AI innovation may offer pockets of growth, but even these will not be immune to broader economic pressures. The interplay between trade policy, monetary policy, and underlying economic fundamentals will dictate the pace and direction of global growth.
Ultimately, the report emphasizes that the path ahead is fraught with challenges. Policymakers must navigate the delicate balance between supporting economic activity and taming inflation, while businesses must strategically adapt to a more fragmented and protectionist global trading environment. The coming months will be critical in determining whether the global economy can successfully weather these emerging storms or if a more significant downturn lies on the horizon. Investors should remain informed, agile, and prepared for a period of ongoing economic recalibration.
This content is intended for informational purposes only and is not financial advice
