OECD slashes GDP growth projections on global unrest

Australia’s growth forecast for next year has been downgraded as ­volatile international economic conditions fuelled by Donald Trump’s tariffs threaten to stoke global inflation, a new OECD report reveals.

OECD secretary-general Mathias Cormann. Picture: AFP

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Australia’s growth forecast for next year has been slashed as ­volatile international economic conditions fuelled by Donald Trump’s tariffs threaten to stoke global inflation, a new OECD report has warned.

Against the backdrop of a flagging Chinese economy and rapidly escalating trade war, the Paris-based research organisation on Monday night sharply downgraded GDP growth projections for the Australian economy.

The OECD now expects the domestic economy will expand by just 1.8 per cent in 2026, down from its December forecast of 2.5 per cent. Its forecast for 2025 was unchanged at 1.9 per cent.

The downgrade means Australia is expected to significantly lag behind its G20 peers, where the average GDP growth rate is expected to reach 3.1 per cent in 2025 before subsequently easing to 2.9 per cent in 2026.

Consumer price forecasts contained within the OECD report project Australia’s headline inflation rate to be 2.4 per cent in 2025, before subsequently easing to 2.2 per cent the following year, and remaining within the RBA’s 2 to 3 per cent target band.

But amid the threat of further trade upheaval, OECD secretary-general Mathias Cormann said global inflation was “expected to decline more slowly than previously anticipated”.

Mr Cormann, who was Australia’s longest-serving finance minister before being appointed to lead the OECD in 2021, said governments and central banks needed to remain cautious in an increasingly “complex global environment”.

“Recent signals of economic weakening highlight the need for prudent monetary and fiscal policies, ambitious structural reforms and multilateral co-operation,” Mr Cormann said.

“By taking these steps, governments around the world can lower risks and uncertainty, support economic resilience and drive sustainable growth that improves living standards for their citizens.”

While the OECD expected the RBA to gradually ease interest rates, the organisation cautioned central banks may need “higher policy rates than would otherwise be the case” in the event that “sizeable” price rises occurred following the implementation of tariffs.

The RBA, which last month cut the cash rate for the first time since November 2020, has flagged that it will tread carefully as it considers when it will next move to trim borrowing costs.

Although not directed specifically at Australia, the OECD also urged governments to demonstrate greater fiscal discipline to ensure they could meet current and future spending needs, such as defence investment and climate change mitigation.

The demand comes after fresh GDP figures, released earlier this month, showed government spending rose to a record share of the Australian economy in the December quarter.

While Jim Chalmers has argued the extra government spend­ing has stopped the economy from contracting, economists have cautioned that the elevated level of public expenditure is spurring demand and tempering the RBA’s ability to reduce interest rates.

Despite the revisions to Australia’s economic forecasts, the domestic economy is expected to fare dramatically better than Canada and Mexico, where the impact of Mr Trump’s aggressive tariffs will be particularly severe.

Mexico is being tipped by the OECD to enter a protracted recession by next year.

Economic activity in the US will also be hit, with projections showing growth in the world’s biggest economy will fall to 2.2 per cent in 2025 and 1.6 per cent in 2026.

The latest OECD forecasts assume no trade policy changes beyond an additional 25-percentage point tariff hike between the US, Canada and Mexico – but that appears increasingly unlikely as Mr Trump threatens to hit every country with further tariffs on cars, pharmaceuticals and agricultural goods.