Growth in the global economy is expected to be stronger this year than previously thought, an influential global policy group has said.
The Organization for Economic Co-operation and Development (OECD) raised its global forecast to 3.2% from the 2.9% it had predicted in June after growth was more resilient than expected in the first half of the year.
This was partly due to “front loading” of activity as firms sought to complete deals before new US tariffs kicked in. However, the OECD warned growth would “soften noticeably” in the second half of the year as the impact of higher tariffs is felt.
It also increased its UK growth forecast for this year to 1.4% from its previous estimate of 1.3%.
Responding to the OECD’s forecast, Chancellor Rachel Reeves said the figures “confirm that the British economy is stronger than forecast – it has been the fastest growing of any G7 economy in the first half of the year”.
The OECD still expects growth in the UK to slow to 1% next year – unchanged from its forecast in June.
It said this slowdown would be caused by a “tighter fiscal stance” – referring to either higher taxes or lower government spending – as well as increased trade costs and uncertainty.
Reeves is expected to put up taxes or cut spending at the Budget in November in order to stick to her own rules on government borrowing.
The UK inflation rate forecast for this year has been raised to 3.5% from the previous estimate of 3.1%, with the OECD noting that the UK is one of several countries seeing sharp rises in food prices.
The most recent official UK statistics indicated that food price inflation rose for the fifth month in a row in August, with beef, butter, milk and chocolate prices continuing to surge.
In the US, growth has been helped by strong investment in tech areas such as Artificial Intelligence (AI), and the OECD has increased its growth forecast for the US this year to 1.8% from 1.6%.
Globally, the US tariffs imposed by President Donald Trump this year continues to affect future prospects for growth. Tariffs are taxes on imported goods and Trump has imposed such levies on products arriving on American shores from various countries.
The OECD said US tariff rates had increased on almost all countries since May, with the overall effective rate hitting 19.5% at the end of August, the highest since 1933.
Trump has argued the import taxes will boost US manufacturing and jobs, but several economists have warned it will push up prices for US consumers.
The scramble to complete trades before the tariffs led to surge in activity in the first few months of the year, the OECD said, but this is now tapering off.
It added the full impact of the tariffs has yet to be seen. Some changes are being phased in over time, it said, while some companies are accepting smaller profit margins for now.
However, it said the impact was “becoming increasingly visible in spending choices, labour markets and consumer prices”.
“Growth is expected to soften noticeably in the second half of this year, as front-loading activity unwinds and higher effective tariff rates on imports to the United States and China dampen investment and trade growth,” it said.