OECD cuts world growth outlook just as NZ starts to recover

The OECD has cut its world growth outlook due to rising trade barriers. Photo / 123rf

Global economic prospects are weakening as substantial barriers to trade, tighter financial conditions, diminishing confidence and heightened policy uncertainty start to bite, the OECD says.

In its latest Economic Outlook, the Paris-based Organisation for Economic Co-operation and Development (OECD) said it expects global growth to slow from 3.3% in 2024 to 2.9% in both 2025 and 2026.

The slowdown is expected to be most concentrated in the United States, Canada, Mexico and China, with smaller downward adjustments in other economies.

In its report on New Zealand, the OECD said an economic recovery is under way, but that the country would need to battle world trade headwinds.

The OECD said growth in the US was projected to decline from 2.8% in 2024 to 1.6% in 2025 and 1.5% in 2026.

In the euro area, growth is projected to strengthen modestly from 0.8% in 2024 to 1.0% in 2025 and 1.2% in 2026.

China’s growth is projected to moderate from 5.0% in 2024 to 4.7% in 2025 and 4.3% in 2026.

At the same time, inflationary pressures have resurfaced in some economies, the OECD said.

The OECD’s assessment is a downgrade compared with its March interim forecasts which came out before US President Donald Trump’s “Liberation Day” announcements on April 2.

In its report on NZ, the OECD said that following the deepest recession since 1991, economic activity began to recover in late 2024.

The expansion is expected to continue with growth projected to rise to 0.8% in 2025 and 1.7% in 2026 supported by lower interest rates, it said.

“However, increased trade restrictions and high uncertainty about trade policy globally will temper external demand, confidence and the pace of the recovery,” it said.

Inflation is set to fall further due to lower oil prices and higher spare capacity including in the labour market.

The unemployment rate is expected to peak in late 2025 at around 5.4% in NZ, it said.

The OECD said the pace of fiscal consolidation was appropriate but may need to be slowed if the expansion stalls.

“Trend growth will remain modest without energy, innovation, investment and skills reforms to lift lacklustre productivity,” it said.

The OECD said the rebalancing of the economy following a severe episode of post-pandemic overheating was well-advanced.

Indicators for the construction sector are showing signs of bottoming out, the report said.

Net inwards migration had fallen from a peak of 135,000 per annum (2.6% of the population), to a more sustainable level of about 30,000.

Commodity export volumes and prices grew strongly in late 2024 and early 2025.

Tourism growth had been buoyant, with arrivals rising to 85% of their pre-pandemic level in 2024, but showed signs of weakening in early 2025.

The additional 10% minimum tariff imposed by the US on imports of goods in April 2025 will increase barriers to exports and notably beef, which benefited from a low-rate tariff quota.

The direct effects of higher trade restrictions are likely to be mainly via weaker export prices rather than lower volumes as in the short run agricultural export volumes are supply driven and NZ is a price taker in the US market, the report said.

In addition, NZ’s export prices are expected to come under pressure from greater competition in markets outside the US.

Weaker external demand is also projected to eventually slow export volume growth, weighing on the expansion.

Looking ahead, the OECD said: “An increasingly febrile and fractured geo-economic environment means NZ will need to work harder working with like-minded countries to expand trade and encourage foreign direct investment.”

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.