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The OECD's Crystal Ball: AI Hype vs. Tariff Reality
The Organisation for Economic Co-operation and Development (OECD) has released its latest Economic Outlook, and the headline is cautiously optimistic: global growth is "holding up better than expected." The reason? An AI investment boom is supposedly offsetting the drag from President Trump's tariff hikes. Sounds good, right? Maybe not.
The OECD forecasts global growth to slow modestly from 3.2% in 2025 to 2.9% in 2026, before rebounding to 3.1% in 2027. These numbers, while seemingly stable, mask a more complex (and potentially unstable) underlying reality. The report highlights a vulnerability to renewed trade tensions and warns that investor optimism about AI could trigger a stock market correction.
The Tariff Tango: Mild Now, Painful Later?
OECD head Mathias Cormann notes that the trade shocks from Trump's tariffs have been "relatively mild" so far. But he also throws in a critical caveat: the full effects are likely to rise as firms deplete their built-up inventories. This is Econ 101, sure, but it's easy to forget in the face of headline numbers. We're in a grace period, folks, not a new normal.
US Economic Outlook: A House of Cards?
The US economy is projected to grow 2% in 2025 (revised up from 1.8%), before slowing to 1.7% in 2026 (up from 1.5%). The OECD credits AI investment, fiscal support, and expected Federal Reserve rate cuts for offsetting the negative impacts of tariffs, reduced immigration, and federal job cuts. That's a lot of moving pieces, and it begs the question: are these offsets sustainable?
The OECD explicitly warns that the Trump administration's fiscal policy is on an "unsustainable trajectory" due to large budget deficits and rising debt. This will require a "significant adjustment" down the line. Translation: the sugar rush won't last, and the hangover will be brutal. The report's own numbers reveal a worrying trend: global trade growth is expected to moderate from 4.2% in 2025 to 2.3% in 2026. This slowdown is directly attributed to the "full effects of tariffs" weighing on investment and consumption. So, while AI might be providing a temporary boost, the underlying trade friction is a persistent headwind.
Global Growth: Regional Variations
China's growth is expected to hold steady at 5% in 2025 before slowing to 4.4% in 2026. The slowdown is attributed to fading fiscal support and new US tariffs. The eurozone's growth forecast was revised up slightly, to 1.3% in 2025, supported by resilient labor markets and increased public spending in Germany. But this is a fragile improvement. Growth is expected to moderate to 1.2% in 2026 as budget tightening in France and Italy takes hold.
AI: Savior or Mirage?
The OECD is betting big on AI. But what if the AI boom is more hype than substance? What if the promised productivity gains don't materialize quickly enough to offset the economic damage from trade wars and unsustainable fiscal policies? This is the part of the report that I find genuinely puzzling. The assumption that AI investment will continue to grow at the current rate seems optimistic, especially given the inherent volatility of technology markets.
Inflation and Monetary Policy: A Tariff-Shaped Wrench
Inflation is projected to gradually return to central bank targets by mid-2027 in most major economies. However, in the US, inflation is expected to peak in mid-2026 due to tariff pass-through before easing. This suggests that the inflationary effects of tariffs are not fully priced in yet, and consumers will feel the pinch even more acutely in the coming years. Most major central banks are expected to maintain or lower borrowing costs over the coming year as inflation pressures ease. The US Federal Reserve is projected to cut rates slightly by the end of 2026, barring inflation surprises from tariffs.
I've looked at hundreds of these filings, and this particular projection is unusual. The report essentially admits that tariffs could throw a wrench into the entire monetary policy outlook. The assumption that the Fed can simply "cut rates" to offset the negative effects of tariffs seems overly simplistic. What happens if inflation remains stubbornly high due to tariff pass-through, even as economic growth slows? The Fed would be stuck between a rock and a hard place.
Reality Check: Unsustainable Offsets
The OECD paints a picture of an economy balancing on a knife's edge. AI investment is propping things up for now, but the underlying fundamentals are shaky. Tariffs are a persistent drag, fiscal policy is unsustainable, and the AI boom could easily turn into a bust. The report acknowledges these risks, but it downplays their potential impact.
The global ocean economy, for instance, doubled between 1995 and 2020, reaching $2.3 trillion by 2020, contributing to between three and four percent of total global gross domestic product (GDP). But future growth could be curtailed by multiple threats, including climate change, environmental degradation, and increased territorial disputes. The OECD report issued in March warns that oceans are struggling under the pressure of human population growth and increased environmental degradation. And then there's the legal aspect. The courts are currently weighing in on whether Trump has the power to levy those tariffs in the first place. The US Constitution says Congress holds the power to impose tariffs, not the president. Small businesses challenging that position in the case VOS Selections v Trump argue that the law doesn’t explicitly allow the president to impose tariffs, and that the tariffs don't rise to the level of an “unusual and extraordinary” emergency.
The IMF also predicted in 2020 that the virus outbreak would slow global economic growth. The IMF expected 2020 world growth to be below the 2.9 percent rate for 2019, and revised forecasts were issued in the coming weeks. IMF: Virus outbreak will slow global economic growth this year
The OECD da
