Europe’s economy is set for a weaker-than-expected recovery as trade disruptions and persistent inflation weigh on sentiment, according to the Organization for Economic Co-operation and Development (OECD).
The Paris-based institution has cut its eurozone gross domestic product growth forecast to 1.0% for 2025, down from 1.3% in its December projections.
The downgrade reflects slowing investment and subdued consumer confidence amid mounting geopolitical and trade risks. Meanwhile, global growth is also expected to weaken, with the OECD cutting its forecast by 0.2 percentage points to 3.1%.
The revised projections were published on Monday in the OECD Economic Outlook, Interim Report March 2025, which warns that global growth is slowing amid rising trade tensions and lingering inflationary pressures. The report highlights a fragile recovery in Europe and significant risks stemming from economic fragmentation.
Euro area growth downgraded, Germany remains a weak link
The eurozone’s projected 1.0% expansion in 2025 marks a 0.3 percentage point downgrade from December’s forecast. Germany, the bloc’s largest economy, faces the sharpest revisions, with GDP now expected to grow just 0.4% in 2025, down from 0.7% previously.
The OECD noted that “heightened uncertainty keeps growth subdued” across the euro area. For 2026, eurozone growth has also been downwardly revised by 0.3 percentage points to 1.2%.
According to the OECD, the broader euro area continues to struggle with weak external demand and elevated borrowing costs, limiting the potential for a strong rebound.
France and Italy also saw slight downward adjustments to 0.8% and 0.7%, respectively.
Spain remains a relative bright spot, with growth forecast at 2.6% for 2025 and at 2.2% for 2026, slightly above prior estimates.
Trade fragmentation and economic uncertainty pose key risks
The OECD warns that escalating trade barriers and geopolitical uncertainty could further weaken global growth.
“Further fragmentation of the global economy is a key concern,” the report stated, adding that “higher and broader increases in trade barriers would hit growth around the world and add to inflation”.
If trade restrictions continue to spread, global GDP could fall by 0.3% over the next three years, while inflation could rise by 0.4 percentage points annually.
Trade disruptions hit North America hardest
The OECD’s latest projections also reflect the economic fallout from newly imposed US trade tariffs under Donald Trump’s administration.
Mexico and Canada have faced the largest downward revisions, with Mexico’s 2025 GDP now expected to shrink by 1.3%—a 2.5 percentage point cut from December’s estimate.
Canada’s growth outlook has been slashed by 1.3 percentage points to just 0.7%.
The US economy has also seen its forecast cut. GDP is now expected to grow by 2.2% in 2025, down 0.2 percentage points from December.
The OECD said that the “negative impacts are projected to be particularly severe in Canada and Mexico” due to their high trade exposure to the United States.
Inflation lingers despite cooling demand
Inflation remains a persistent challenge. While price growth has slowed from its 2022 peaks, headline inflation in the eurozone is expected to remain at 2.2% in 2025 before easing to 2.0% in 2026.
Services inflation continues to exert pressure, with the OECD noting that “services inflation is still elevated, with labour markets tight, and goods inflation is picking up from very low levels”.
In the United Kingdom, inflation is expected to stay higher for longer, averaging 2.7% this year before declining to 2.3% in 2026. In the United States, the OECD noted that “core inflation is now projected to remain above central bank targets” in 2026, with inflation expected at 2.8% in 2025.
Monetary easing expected, but cautiously
With inflation still above target, central banks are unlikely to cut rates aggressively. The OECD expects the European Central Bank (ECB) to lower rates gradually, with its key policy rate projected to fall to 2% by late 2025. The Bank of England is also expected to reduce rates but at a measured pace.
The US Federal Reserve, however, “is projected to remain unchanged until well into 2026 in the baseline projection”. Meanwhile, Japan is expected to continue its slow exit from ultra-loose monetary policy.
A call for cooperation and structural reform
The OECD stresses that greater international cooperation is needed to avoid further economic fragmentation.
“Countries need to find ways of addressing their concerns together within the global trading system,” the report said, adding that “living standards would benefit from coupling these measures with efforts to strengthen the resilience of supply chains”.
Structural reforms will also be crucial in boosting long-term growth, particularly in Europe. The OECD calls for measures to enhance productivity, reduce regulatory burdens, and invest in digital infrastructure. The report also highlights that “faster diffusion of artificial intelligence technologies could also have significant productivity benefits”.
As Europe and the global economy navigate an increasingly uncertain landscape, “significant risks remain,” the OECD warns. While growth has proven resilient so far, the global economy faces a “key concern” in the form of rising trade tensions, policy uncertainty, and stubborn inflation.
