World economy to accelerate in 2025, but recovery threatened by higher tariffs, OECD says

In a quarterly report, the Paris-based research body said it now expects the world economy to grow by 3.3% next year, a pickup from the 3.2% rate of expansion it estimates for this year.

It had previously expected the global growth rate to be unchanged in 2025, but now expects the U.S. economy to grow by 2.4%, having previously projected an expansion of 1.6%.

“Growth continues to be resilient," said Alvaro Pereira, the OECD’s chief economist, in an interview with The Wall Street Journal. “We see U.S. growth being very robust."

However, those forecasts assume no changes in trade policies, and that appears unlikely given that U.S. President-elect Donald Trump has said he will impose higher tariffs on imports from a wide range of countries.

Pereira warned that there are increasing risks to the growth outlook from trade tensions and protectionism, with higher tariffs likely to weaken growth and push consumer prices higher.

Another threat to the recovery from the Covid-19 pandemic and the inflation surge is wide budget deficits in a number of countries, including the U.S. and France.

Yields on U.S. government bonds rose in the run-up to and in the immediate aftermath of the country’s presidential election as investors worried about the prospect of bigger budget imbalances in the second Donald Trump administration. Although yields have fallen slightly since the appointment of hedge-fund manager Scott Bessent to lead the Treasury Department, those concerns remain.

“The debt continues to rise, deficits are relatively large, and we think it’s quite important to make sure that fiscal policy improves the sustainability of the public finances," said Pereira.

The French government has pushed through a package of spending cuts and tax rises that aim to reduce its budget deficit from a projected 6% of economic output this year, but lacks support from legislators and faces a no-confidence vote later Wednesday. The premium investors demand to hold the government’s long-term debt has risen to its highest since the eurozone debt crisis of 2012.

“The situation is for now manageable, but it’s important to make sure that it continues to be manageable," said Pereira. “It is crucial to have fiscal discipline."

With inflation rates set to fall further and reach central bank targets in most countries by 2026, the OECD said central banks should lower their key interest rates, but in a manner that is “carefully judged" to ensure prices of services in particular continue to slow.

It expects the Federal Reserve’s key rate to fall to between 3.25% and 3.5% by the first quarter of 2026, and expects the European Central Bank’s key rate to fall to 2% by the end of 2025. It also expects the Bank of Japan to raise its key rate further, and to 1.5% by the end of 2026.

The OECD nudged up its 2025 growth forecasts for India—which it described as a “shining light" for the global economy—and China. Pereira said the world’s second-largest economy will continue to be held back by large declines in real estate prices.

“Sometimes it takes a long time for these effects to dissipate," he said. “Exports continue to do very well, but consumption is very subdued."

Responding to the new government’s November budget, the OECD also raised its growth forecast for the U.K. to 1.7% from 1.2%. By contrast, it lowered its growth forecast for Germany to 0.7% from 1%.

“It is absolutely essential to undertake structural reforms to boost productivity," Pereira said of Europe’s ailing powerhouse, highlighting a “shortfall" in Germany’s digital infrastructure.

Write to Paul Hannon at paul.hannon@wsj.com