The global economy remains resilient, with inflation continuing to moderate and global trade starting to revive. Lower inflation is providing a boost to real household income growth and spending, although consumer confidence has yet to recover to pre-pandemic levels in many countries. Labour market pressures continue to ease, though unemployment generally remains at or near historical lows. Real interest rates remain restrictive, but lower nominal yields have generated some early signs of revival in interest-sensitive housing and credit markets. Headline inflation has now returned to target in a rising number of advanced and emerging-market economies despite lingering pressures in service sectors.

Global GDP growth is projected to be 3.2% this year and 3.3% in 2025 and 2026 (Table 1.1). Low inflation, steady employment growth and less restrictive monetary policy will all help to underpin demand, despite some mild headwinds from the necessary tightening of fiscal policy in many countries. Some cross-country differences are likely to persist in the near-term but will fade as solid growth in the United States and Brazil starts to ease and the recovery in Europe gains pace. Buoyant domestic demand in India and Indonesia and the recently announced stimulus measures in China and Japan are expected to support continued strong growth in Asia. Annual consumer price inflation in the G20 countries is expected to moderate to 3.5% and 2.9% in 2025 and 2026 respectively, from 5.4% this year. By the end of 2025 or early 2026, inflation is projected to be back to target in almost all major economies.

There are significant downside risks to the outlook. Elevated geopolitical tensions remain an important near-term adverse risk, particularly if the evolving conflicts in the Middle East were to intensify and pose risks to the security of oil supplies from the region. An unexpected sharp oil price rise would raise global inflation substantially and hit confidence and growth, especially in oil importing countries. Trade policy uncertainty has risen sharply in recent months, adding to the concerns generated by the ongoing increase in the number of import-restrictive measures being implemented by the major economies. Further increases in global trade restrictions would add to import prices, raise production costs for businesses and reduce living standards for consumers. Adverse growth surprises or deviations from the projected smooth disinflation path might also trigger disruptive corrections in financial markets and turbulence in capital flows or exchange rates in emerging-market economies. Financial vulnerabilities also persist from high debt levels, stretched asset valuations and the deteriorating credit quality of some borrowers, including in the commercial property market. The growing scale and interconnectedness of less regulated non-bank financial institutions also raises the potential for adverse shocks to spill over rapidly across different market segments.

There are some uncertain factors that could generate positive surprises. Improvements in consumer confidence as purchasing power recovers more fully might result in lower-than-expected household saving rates, boosting spending though also inflationary pressures. An early resolution to major geopolitical conflicts could also improve sentiment, and lower energy prices, especially with the likelihood of excess supply in oil markets next year. Positive supply shocks, such as stronger-than-expected labour force growth or a more vigorous revival of investment as financing conditions improve, would also support stronger growth.

Against this backdrop, the key policy priorities are to ensure a continued and lasting decline in inflation, enhanced efforts to establish a credible fiscal path that will secure debt sustainability, and ambitious reforms to raise sustainable and inclusive growth in the medium term.

• As inflation moderates towards central bank targets policy rate reductions should continue in advanced economies, but the timing and extent of reductions should be carefully judged to ensure that underlying inflationary pressures are durably contained. If inflation returns to target by 2026, as projected for the majority of countries, interest rates should be at or close to neutral levels by then to ensure that growth stabilises around trend and that inflation does not undershoot. In Japan, a gradual increase in policy interest rates would be appropriate over the next two years provided inflation settles at around 2%, as projected. Rate reductions in the advanced economies help to enhance policy space in the emerging-market economies. Scope exists to lower policy interest rates in most of these countries over the next two years, but the pace should be cautious to maintain anchored inflation expectations and minimise risks of disruptive capital outflows.

• Decisive fiscal actions are needed to ensure debt sustainability, preserve room for governments to react to future shocks and generate resources to help meet large impending spending pressures. Stronger efforts to contain and reallocate spending and enhance revenues, set within credible medium-term adjustment paths tailored to country-specific circumstances, are key to ensuring that debt burdens stabilise. Consolidation efforts should intensify as the monetary policy stance becomes less restrictive provided, as projected, growth is robust enough to withstand additional fiscal headwinds. Policy priorities differ across countries, but careful design of the pace and nature of adjustment is needed everywhere to provide adequate support to those in need and conserve the resources required to address longer term challenges such as the climate transition and ageing.

• Faced with modest growth prospects ahead, ambitious structural policy reforms are needed in all countries to help improve the foundations for stronger and more sustainable growth and help overcome the fiscal challenges that countries face. In the median OECD economy, the annual growth of potential output per capita is estimated to now be 0.7 percentage points lower than before the global financial crisis. Even sharper declines have occurred in some emerging-market economies. Reforms to enhance education and skills development, and reduce constraints in labour and product markets that impede investment and labour mobility, are essential to improve productivity, enhance the spread of new technologies and boost labour force participation. Such reforms, along with steps to enhance job quality in lower-paid sectors, are needed to help overcome structural labour shortages across countries, as discussed in Chapter 2.

• Enhanced international co-operation is needed to support international trade and reduce risks of geopolitical fragmentation by preserving open international markets operating within a rules-based global trading system, to ensure faster and better co-ordinated emissions reduction efforts, and to address debt distress in lower-income countries without causing undue hardship.

The global economy has remained resilient in 2024 (Figure 1.1, Panel A). Disinflation has supported household spending and enabled monetary policy easing in most major economies, helping offset the uncertainty created by geopolitical and regional tensions and lingering cost-of-living concerns. Nonetheless, there continue to be notable differences in the strength of activity and the recovery in incomes across countries, with real GDP per capita estimated to have declined in around one-fifth of OECD member states in the first three quarters of 2024, as well as in Argentina.

In the advanced economies, growth in the United States remains solid, with private consumption underpinned by real wage gains. On a quarterly basis, GDP growth has also been relatively robust in the Netherlands and Spain. However, there have been weaker economic outcomes elsewhere. Hungary and Latvia were in technical recessions in the third quarter and while quarterly output rose slightly in Germany, weak sentiment continues to weigh on investment activity.

Recent economic developments in emerging-market economies have been mixed. In China, GDP growth held up in the third quarter, with industrial production growth underpinned by strengthening exports, but consumer demand remains soft and the protracted correction in the real estate sector continues. Domestic demand is driving ongoing expansions in India and Indonesia, and growth has remained solid in Brazil amid stronger private consumption and government spending. In Argentina, there are tentative signs of recovery in recent months following a contraction since mid-2022.

Monthly indicators suggest stable near-term growth momentum for most economies. Business surveys point to continued growth but have recently weakened in several large European countries. The pace of activity also remains more modest in manufacturing than in services sectors (Figure 1.1, Panel B). Consumer confidence has risen in Europe, as well as in some emerging-market economies where growth has strengthened, such as Brazil. Industrial production has continued to stagnate in the advanced economies but has risen steadily in China. Retail sales growth has increased over the past few months in both OECD and non-OECD economies. Car sales continue to be broadly flat in the United States and the euro area, but have shown recent signs of picking up in China and Japan.

Labour market tightness has gradually eased in many countries. Ratios of job vacancies to the number of unemployed people have continued to decline, including in Australia, Canada, Sweden, Norway and the United States (Figure 1.2), and are now back around or below 2019 levels in the majority of countries. This has coincided with cyclical moderation in the severity of reported labour shortages. Unemployment rates have picked up in some countries, although generally remain low by historical standards, with recent increases often reflecting higher labour force participation rates rather than a slowdown in employment growth. Strong immigration flows have been an important factor behind rising labour supply in a number of countries. There are few signs that reduced labour demand has prompted employers to cut hours worked significantly, with average hours per worker remaining broadly stable in most countries. The public sector has recently been a strong source of labour demand in some countries, with its contribution to total employment growth in 2024 significantly above pre‑pandemic norms in Canada, France, the United Kingdom and the United States.

Nominal wage growth remains strong but has generally moderated since mid-2023, in line with the easing of labour market imbalances and the ongoing decline in headline inflation. The labour share of income (including the labour share of self-employed incomes) has risen and is above levels observed prior to the pandemic in around one-third of OECD countries. Growth in unit labour costs has generally eased as wage gains have moderated, especially in countries where labour productivity growth has picked up, such as Denmark, Spain, the United Kingdom and the United States. In contrast, very weak recent labour productivity growth in Australia, Germany and some smaller European countries, such as Estonia and Romania, has kept unit labour cost growth relatively high.

The combination of continued employment growth, strong nominal wage gains and disinflation has supported further improvements in real household incomes. Real household disposable income per person is now above the pre-pandemic level in most OECD countries and in many is also above the level that might have been expected based on the pre-pandemic trend, including in Portugal, Hungary, Slovenia, and Greece (Figure 1.3). However, this is not the case in some economies, such as Estonia, Norway, Latvia, Sweden, Slovak Republic and Korea.

Private consumption growth remains somewhat subdued despite the gradual pick up in household real disposable incomes. There has been strong spending growth in a few economies including the United States, Spain, Brazil, and India, but median private consumption growth across the OECD countries was 1.3% over the year to the second quarter of 2024, compared with an average annual pace of 2.5% between 2015 and 2019. Consumer confidence remains below historical average levels, especially in larger advanced economies and China, and household saving rates are relatively high in many countries (Figure 1.4). Perceptions of lower purchasing power by households in the wake of very high price inflation may be a factor contributing to subdued sentiment, with it taking time for consumers to digest higher price levels. Another factor may be relatively high inflation during the recent inflationary episode in frequently purchased items particularly salient to household budgets, such as food and energy.

Analysis of a group of advanced OECD economies suggests that consumer confidence is more sensitive to food and energy price inflation than other items (Box 1.1). Moreover, combined food and energy price inflation has outstripped growth in nominal household disposable income since the onset of the pandemic in a number of economies (Figure 1.7). In Germany, for instance, food and energy prices rose by around 15 percentage points more than nominal household disposable income between the final quarter of 2019 and the third quarter of 2024.

Housing investment is estimated to have fallen by close to 4% in the median OECD economy over the year to the third quarter of 2024, partly in response to high interest rates. Real estate investment also continues to fall in China and is now 40% below the peak in late‑2020 in nominal terms. Nonetheless, there are tentative signs of activity picking up in some housing markets, with the number of transactions beginning to recover in France, Korea, Spain and the United Kingdom. Real house prices have continued to stabilise in OECD countries, with valuations having bottomed out in early‑2023, and population growth helping to bolster housing demand.

Real business investment has generally remained weak amid still-tight financing conditions, sluggish demand conditions in some countries, and significant policy uncertainty. Over half the OECD economies with available data reported a contraction in business investment in the second quarter of 2024, with several seeing a continued decline in the third quarter, including Denmark, France and Japan. However, investment has continued to grow in some of the major advanced economies. In the United States, there has been particularly rapid growth in private intellectual property and transport investment this year.

Headline inflation has continued to ease in most countries through 2024 (Figure 1.8, Panel A), led by further falls in food, energy and goods price inflation. In the median OECD economy, annual inflation fell from 3.8% in October 2023 to 2.3% by October 2024. There was also a material decline in headline inflation in Brazil and India during much of this period, though inflation has recently increased again in both countries. In China, inflation has stayed very low, with subdued food prices dragging on aggregate price growth. Headline inflation in October was back to central bank targets in about two‑thirds of advanced economies and three-fifths of the emerging-market economies covered (Figure 1.8, Panel B). However, core inflation is still higher than desirable in many countries, pointing to some lingering price pressures. For instance, the prices of about half the items in the United Kingdom and United States inflation baskets were still growing at an annual rate above 3% in October 2024. A decomposition of GDP deflator growth in nine major economies suggests that unit labour costs account for the majority of recent price growth (Figure 1.8, Panel C). Unit profit growth has moderated, now contributing only a small share to inflation, and helping to offset other cost pressures (Figure 1.8, Panel D).

Services price inflation is still proving persistent, and was 4% in the median OECD economy in October. Many countries have experienced a prolonged period of demand rebalancing back towards services activity since most pandemic restrictions were lifted in early 2022. This strong demand for services compared with goods, as well as labour shortages in some services sectors, has contributed to services costs and prices growing relatively rapidly. While the ratio of goods to services consumption volumes in the median OECD country is now back to its pre-pandemic trend (Figure 1.9, Panel A), the ratio of goods to services prices remains comparatively high (Figure 1.9, Panel B). Pre-pandemic trends were associated with goods price growth that was around 0.8 percentage points lower than services price growth in the typical economy. If relative prices are to adjust back to the pre-pandemic trend, this gap will need to be wider for a period, either through higher services inflation than in the pre-pandemic period, lower goods inflation or some combination of the two.

Housing costs, one component of services price inflation, have exerted persistent upward pressure on inflation in many countries, despite differences in their measurement in national price indices. Housing supply has not kept up with population growth in recent years, including that due to immigration. Strong housing demand and the rebound in labour mobility after the pandemic have helped to keep prices high, despite restrictive monetary policy, and have generated strong rises in housing rents in several advanced economies, including the United Kingdom, Canada, Australia, Latvia and Portugal (Figure 1.10). Less affordable housing in the most dynamic regions can constrain the ability of individuals to locate there, contributing to labour shortages (see Chapter 2). As interest rates further ease, there could be continued upward pressure on housing prices unless housing supply expands substantially.

Global trade volumes continued to recover steadily in 2024, with quarterly growth estimated to have reached 4.3% (at an annualised rate) by the third quarter of 2024 (Figure 1.11, Panel A), helped by the recovery in US goods consumption. Export volume growth also strengthened in China and the Dynamic Asian economies, amidst strong demand for technology-related products. Services trade has remained relatively buoyant in 2024, with solid growth in business services and tourism.

Some recent activity data suggest that positive growth momentum in global trade has been sustained, with container volumes and international passenger volumes continuing to rise (Figure 1.11, Panel B). Other indicators of trade have been mixed. Tech production in Asia – an indicator of the global tech cycle – strengthened in the third quarter, but global car sales have been subdued for most of 2024 and survey indicators of export orders have eased, particularly for manufactured goods (Figure 1.12). The softness is most pronounced in Europe, with a balance of firms currently indicating that export orders are contracting in both services and manufacturing in the three largest economies. This may in part be linked to the region’s exposure to trade in cars, which made up 6.9% of extra-EU and 5.9% of intra-EU export values in 2023.

Overall supply chains continue to function well, despite an increase in delayed shipments and shipping congestion in some key hubs in Asia due to the longer shipping distances for container ships avoiding the Red Sea. Air freight volumes have also risen this year, benefitting from strong e‑commerce as well as efforts to avoid risks of delay linked to the Red Sea and longer maritime journey times. In line with weaker sentiment, shipping prices have moderated from their July peaks (Figure 1.13, Panel A) as the rush to bring forward orders to avoid delays for the end-of-year holiday season dissipated. Nonetheless, container shipping cost rises seen this year, with costs having doubled from 2023, will continue to be gradually passed through into manufacturing import prices (Figure 1.13, Panel B).

Summary indicators based on a wide range of financial market data continue to indicate that financial conditions have eased materially since 2023 in both advanced economies and emerging markets, despite some fluctuations from the short-lived spike in market volatility in early August and a renewed upward drift in long-term interest rates over the past two months, especially in the United States. Financial conditions remain close to their long-term average on balance, albeit somewhat tighter and more heterogenous across emerging-market economies than in advanced economies (Figure 1.14). Related indicators of systemic market stress have also remained at low levels. Real forward-looking interest rates are still positive and stable at comparatively high levels, but equity prices have strengthened, and credit conditions have begun to improve. The US dollar has also appreciated significantly in recent months.

Market expectations of the future path of policy interest rates have continued to shift, with earlier expectations of sizeable policy easing being partially reversed more recently. Nonetheless, there has been a moderate decline of long‑term interest rates in most major advanced and emerging-market economies, helped by the onset of policy rate reductions in a broader number of economies (Figure 1.15, Panel A). Term spreads (between 10 and 2-year bond yields) have turned positive in the United States, the euro area and the United Kingdom for the first time since 2022. Within the euro area, sovereign bonds spreads relative to Germany have stabilised or even fallen slightly in most countries, but have widened since the spring in France, reflecting significant political uncertainty and a need for sizeable fiscal consolidation over the next few years.

Bond yields have declined further in most emerging-market economies, although Brazil is one notable exception, with upside inflation surprises prompting the central bank to raise policy rates again. In contrast, government bond yields have reached a record low in China, reflecting the subdued outlook and further monetary stimulus measures. Spreads to USD-denominated bonds have remained low across most emerging-market economies, despite higher equity price and currency volatility.

Equity markets have generally continued to strengthen, despite already-stretched valuations in some sectors (see the risks section) and the turbulence seen in early August. The market volatility in August stemmed from changing perceptions about the health of the US economy and a reassessment of expected interest rate differentials between Japan and the United States following an increase in policy interest rates in Japan in late July. This prompted a significant unwinding of the yen carry trade (borrowing at low rates in Japan to finance asset purchases elsewhere) and a sharp appreciation of the yen. Equity market volatility in the United States and Japan spiked, albeit moderately (Figure 1.15, Panel B), and Japanese equities recorded significant losses, with smaller price declines also occurring in other markets. The unwinding affected exchange rate markets more broadly, leading to a depreciation of high-yield investment currencies, especially in Latin America. The stress proved short-lived, with better subsequent economic news helping equity prices to recover. Nonetheless, this episode illustrates the extent to which markets remain sensitive to macroeconomic surprises and vulnerable to sudden repricing that is quickly transmitted across different countries and market segments.

Corporate credit spreads to risk-free rates have declined to levels below long-term averages, reaching their tightest levels since 2007 in the United States. Improving borrowing conditions and tight credit spreads have supported corporate bond issuance in 2024 (Figure 1.16, Panel A). In parallel, bank credit growth has stabilised in large advanced and emerging-market economies and begun to pick up in a few (Figure 1.16, Panel B). Nonetheless, lending growth remains modest in real terms. Although credit standards remain tight in some economies, credit demand has started to recover for both households and firms. Bank lending and deposit rates have continued to decline in the wake of monetary policy easing, with deposit rates falling at a comparatively faster pace than lending rates. Banks continue to benefit from enhanced profitability helped by higher loan‑deposit spreads and limited credit losses. However, delinquency rates have continued to rise in some market segments that are particularly sensitive to high interest rates, such as credit cards, car purchase loans and commercial real estate.

Global GDP growth is projected to be 3.2% this year and 3.3% in 2025 and 2026 (Figure 1.17, Panel A). The lagged impact of monetary policy tightening on growth is continuing to moderate, and further reductions in policy rates as inflation declines are expected to support interest-rate-sensitive expenditures in 2025-26, notably private investment. Continued disinflation will help to boost real household income growth and there is scope in some countries for a further moderation of household saving ratios, supporting private consumption growth. In OECD economies, GDP growth is projected to be modest relative to the pre-pandemic period, at 1.9% in both 2025 and 2026, but in line with estimated underlying potential output growth. In non-OECD economies, aggregate growth is anticipated to ease slightly with emerging Asia continuing to be the main contributor to global growth (Figure 1.17, Panel B).

Central banks are assumed to further lower monetary policy rates as inflation continues to fall and labour market pressures ease. In most economies, real interest rates could decline to be around estimates of neutral levels in 2026. At the same time, fiscal policy is projected to be tightened in many OECD countries in 2025 and 2026, generating some mild headwinds to growth. Continued fiscal and monetary support is expected in China, but in Brazil, India, and several other large emerging-market economies fiscal policy is projected to be more restrictive in 2025 and 2026, while policy interest rates are projected to decline.

The prospects for individual major economies and regions are as follows:

• In the United States, output growth is expected to continue at a solid pace. This partly reflects recent strong immigration flows that have expanded the productive potential of the economy. As labour force growth slows, the pace of private consumption is expected to moderate. Further monetary policy easing will support investment, although the impact will be partly offset by some borrowers having to refinance at higher rates than when they borrowed before. On an annual basis, GDP growth is projected to be 2.8% in 2024, 2.4% in 2025 and 2.1% in 2026. In Canada, a recovery in business investment is expected, with GDP growth projected to be 1.1% in 2024 before rising to 2% in both 2025 and 2026. Inflation in both economies is anticipated to moderate further, with both headline and core inflation projected to be consistent with central bank targets by 2026.

• The Japanese economy is expected to experience a sharp growth rebound to 1.5% in 2025, as real wage gains, rapid profit growth and fiscal subsidies boost private consumption and investment. In 2026, GDP growth is projected to ease to 0.6%, close to estimated potential growth, amid a move towards a more restrictive macroeconomic policy mix. Strong domestic demand growth will also underpin growth in Korea, with GDP projected to rise by 2.3% in 2024, and 2.1% in 2025 and 2026. In both Japan and Korea, inflation is anticipated to stabilise around 2% in 2025 and 2026.

• Growth in the euro area is projected to pick up from 0.8% this year to 1.3% in 2025 and 1.5% in 2026, with spare capacity eventually being eliminated by the end of 2026. Lower policy interest rates and the ongoing spending of the Recovery and Resilience Facility funds will support investment, and private consumption growth will benefit from tight labour markets and further disinflation. Moves towards a more restrictive fiscal stance will however damp growth in some member states. Core inflation is projected to fall from 2.9% in 2024 to 2.4% in 2025 and 2.0% in 2026. Real income gains and the increase in public expenditure announced at the end of October will support activity in the United Kingdom, with GDP growth projected to be 0.9% in 2024, 1.7% in 2025 and 1.3% in 2026, despite higher taxation. Core inflation is projected to fall from 3.7% in 2024 to 2.8% in 2025 and 2.3% in 2026.

• In China, economic growth is projected to ease gradually from 4.9% in 2024 to 4.7% in 2025 and 4.4% in 2026. Consumption growth will be stable but dampened by still high precautionary savings and continued weakness in real estate markets, keeping inflation low. Investment growth will benefit from monetary policy easing and stronger government spending, with the local government special bond quota being raised in November and recently announced stimulus measures likely to offer support.

• India and Indonesia are projected to continue to enjoy rapid and broadly stable economic growth in the next two years. Rapid increases in public infrastructure spending and ongoing strong private consumption growth in India are projected to sustain real GDP growth of just under 7% in FY 2025‑26 and FY 2026-27. The Indonesian economy is projected to grow by 5.1% in 2024, 5.2% in 2025 and 5.1% in 2026. Private consumption is projected to remain solid and investment to gain momentum, as business confidence improves, low inflation persists, and interest rates fall. In both economies, headline inflation is anticipated to be in line with central bank targets in 2025 and 2026.

• The Mexican economy is projected to grow moderately, by 1.4% in 2024, 1.2% in 2025 and 1.6% in 2026, with significant fiscal consolidation in 2025 weighing on growth. While consumption will be supported by inflation declining to target in 2025, a slowdown in formal job creation will contribute to household spending restraint. In Brazil, in contrast, strong job creation and wage growth are expected to support robust household consumption gains in 2025, despite higher policy interest rates. GDP growth is projected to remain solid, with the economy expanding by 3.2% in 2024, 2.3% in 2025 and 1.9% in 2026. Inflation is projected to drop below 4% by the latter half of 2025, with monetary policy easing assumed to resume in mid-2025.

Following the weakness of 2023, annual global trade volume growth is projected to improve to 3.5% in 2024, and 3.6% in 2025, before moderating to 3.5% in 2026. Expanding trade between emerging‑market economies, as well as the supportive upturn in investment and consumption growth in large advanced and emerging-market economies, help to underpin the continued expansion. Trade growth is also projected to become more balanced, helped by an upturn in trade in Europe (Figure 1.18, Panel A). The overall trade intensity of global growth over 2024-26 is projected to be marginally stronger than the average over the pre-pandemic decade (Figure 1.18, Panel B). However, this is not the case in all economies, with trade intensity generally lower in the advanced economies, particularly in Europe, but substantially higher in China and a number of other emerging-market economies. As a result, China’s share of global trade is projected to rise further over the next two years.

Global current account balances are projected to remain relatively stable in 2025-26 compared to 2024, with the United States continuing to run a large current account deficit, despite past increases in trade policy restrictions, as export growth remains relatively contained and the import intensity of demand stabilises. China’s current account surplus is projected to rise further after a sharp increase in the third quarter of 2024.

Employment growth in the OECD is expected to remain resilient, but to soften over the next two years. In the median OECD country, the annual pace of employment gains is projected to average 0.8% over 2025-26 against an average of 1.2% in 2023-24 (Figure 1.19, Panel A). In some emerging-market economies, such as Brazil, recently strong employment growth is also projected to slow. Labour force growth in the median OECD economy is expected to ease from the very rapid recent rate, with migration inflows moderating. With employment growth projected to grow at a similar pace to the labour force, the unemployment rate is projected to stabilise around its currently low level in most economies.

A projected pick-up in labour productivity growth over the next two years, combined with an easing of nominal wage growth as labour market pressures fade, should allow unit labour cost growth to moderate (Figure 1.19, Panel B). In the OECD, unit labour cost growth is projected to soften from 4.1% in 2024 to 2.6% in 2025 and 2.2% in 2026. This should help reduce inflationary pressures, especially in services sectors. A further decline in headline inflation is projected in those advanced and emerging‑market economies where inflation is currently exceeding the target (Figure 1.20). Inflation in Argentina and Türkiye is projected to remain in double digits in 2026, but to decline markedly from current rates.

Geopolitical risks remain elevated (Figure 1.21, Panel A). An intensification of the evolving conflicts in the Middle East, or Russia’s war of aggression in Ukraine, could lead to market repricing of sovereign risk in the affected regions and disrupt global energy markets. While the global oil market appears adequately supplied at present, damage to energy infrastructure could tighten the market balance and cause investors to reassess global economic prospects.

The baseline economic projections assume steady energy and food commodity prices over the forecast period. However, an unexpected sharp oil price rise would raise global inflation substantially and reduce growth, especially in oil importers, with weaker real incomes and tighter financial conditions hitting consumer spending and investment (OECD, 2024a). The impacts could be even more pronounced if oil supply were to be disrupted or if shipping and other transport infrastructure were damaged. For example, the Strait of Hormuz is used to transport around 30% of the global trade in oil and 20% in liquefied natural gas, with no alternative means to bring these volumes to market. Any damage to tankers travelling through the Strait would also add to the disruptions over the past year in the global tanker market.

Greater trade protectionism, particularly from the largest economies, is another key downside risk. Trade policy uncertainty has risen sharply in recent months, although it is not yet back to the levels seen in 2018-19 (Figure 1.21, Panel B). More broadly, the stock of import-restrictive measures in the G20 economies continues to rise (WTO, 2024). These are estimated to now affect 12.7% of G20 imports, over three times the coverage of such measures in 2015. Recent years have also seen rising numbers of reforms to investment policies to safeguard national security (OECD, 2024d), creating obstacles to cross‑border investment. Higher uncertainty and continued increases in trade-restrictive measures could raise costs and prices, deter investment, weaken innovation and ultimately lower growth. An intensification of policy efforts to de-couple economies, including through the use of FDI and ownership restrictions, particularly in key new growth areas, would over time drag on global productivity growth and the pace at which emerging-market economies are able to leverage trade to raise incomes.

Further disinflation may be slower than currently anticipated, hampering the ability of central banks to ease monetary policy to the extent currently assumed. The baseline projections foreshadow core and headline inflation both continuing to move down over 2025-26 as unit labour cost growth moderates with a pick-up in productivity growth and a moderation in wage gains. This results in a steady projected decline in underlying inflation to levels consistent with those observed prior to the pandemic. However, there are several factors that could result in higher core inflation than expected. Disinflation in services has so far been slower than in past inflation episodes (Amatyakul, Igan and Lombardi, 2024) and this could continue to be the case. For instance, bringing aggregate inflation back to target may require year-on-year services price inflation to decline by 3 percentage points in the United Kingdom and by over 1 percentage point in many other advanced economies, including the euro area, the United States and several economies in Central and Eastern Europe, assuming core goods inflation remains at its current pace (Figure 1.22). Nonetheless, there is significant heterogeneity across countries, with this metric suggesting that current rates of services inflation may be consistent with inflation targets in other countries including Korea, Mexico, New Zealand and Israel.

Services inflation could also stay relatively high if relative prices were to move back in line with the pre-pandemic trends in the ratio of goods to services prices (Figure 1.9). Moreover, given the relatively high labour intensity of many services activities, the re‑emergence of further labour shortages if the skill profile of the workforce does not keep pace with changes in employer demand could also put upward pressure on labour costs and inflation. If housing investment does not revive, the continuation of the weak housing supply growth seen in recent years may also mean more persistent housing cost inflation than anticipated.

Goods price inflation could also rise from the current low level if trade restrictions increasingly add to import costs or if there is a renewed revival of global shipping costs. The baseline projection implicitly assumes that shipping prices will remain elevated compared to 2023 levels.1 A sustained additional rise of 100% could add 0.14 percentage points to OECD inflation in 2025-26 and more to inflation in emerging‑market economies.

The adjustment to higher interest rates is not yet fully complete, with borrowing rates still being renegotiated and low-yield debt maturing and being replaced by new household and business loans. Asset valuations are stretched in some market segments, with low risk premia, and the credit quality of some borrowers is deteriorating. Downside surprises about growth prospects or deviations from the expected smooth disinflation path entail risks of rapid repricing in equity and corporate bond markets and an increase in volatility. The episode of market volatility in early August 2024 was one reminder of these repricing risks.

Equity valuations remain stretched in many economies and sectors, such as technology and healthcare (Figure 1.23), and the underlying expectations of future growth in corporate earnings may turn out to be overly optimistic (BIS, 2024). High valuations and the high proportion of equity market valuations concentrated in a small number of individual companies increases the likelihood of idiosyncratic shocks to these companies generating systemic shocks (ECB, 2024c). Corporate debt markets could also come under increasing stress due to a rise in risk premia amid high debt levels and refinancing needs, as approximately 30% of corporate bonds outstanding (USD 12.3 trillion) will mature by 2026 (OECD, 2024c). While defaults have increased, some projections suggest they may have already peaked (S&P Global Ratings, 2024a), though downside concerns remain for the riskiest borrowers.

The assets of non-bank financial intermediaries (NBFIs) have grown significantly in recent years, especially in the euro area, surpassing bank assets in 2022 in major advanced economies (Figure 1.24, Panel A). There are a large number of different types of financial institutions within NBFIs, many of which are less regulated than banks. This raises their vulnerability to financial distress following periods of volatility. Interconnections between NBFIs, as well as with banks, raise spillover risk, as vulnerabilities in one market segment can spread to others. A particular concern is that significant asset repricing, along with the concentration of exposures and an increase in volatility, could affect the resilience of non-bank financial institutions, especially where leverage has increased and liquidity is low (ECB, 2024c). Some market participants could need to cover leveraged positions through asset sales or liquidity withdrawals from money-market funds to meet margin calls, potentially amplifying volatility, asset price declines and negative feedback loops.2

Banks could face rising non-performing loans and unexpected deposit withdrawals by NBFIs if credit quality deteriorates or if volatility surges. NBFIs’ deposits held at banks are a liquidity buffer that would likely be used first to meet redemptions and cash needs (ECB, 2023). In 2023, exposure to NBFIs accounted for 17%, 15% and 8% of banks’ assets in the United States, Australia and the euro area respectively.3 Cross-border linkages between banks and NBFIs have also grown significantly over the past decade (Figure 1.24, Panel B). This raises risks that vulnerabilities in foreign NBFIs spill over to domestic banks. The fast-growing private credit market is one example of the linkages between banks and NBFIs and the potential risks that may arise (Box 1.2).

Growing linkages between different NBFIs could also amplify spillovers in the event of significant market adjustments or sizeable losses. For instance, Australian and US investment funds rely significantly on institutional investors, with 72% and 28% of their respective liabilities sourced from them. This makes investment funds vulnerable to sudden changes in risk sentiment and asset allocation preferences of institutional investors, potentially amplifying liquidity pressures at investment funds. Equally, losses of investment funds and other financial intermediaries may result in losses for institutional investors and money-market funds, which could undermine institutional investors’ resilience and increase money-market fund redemption risk.4

Commercial property prices have been declining since mid-2022 in many countries and some market segments, particularly office buildings (Figure 1.26, Panel A). Although commercial real estate exposures of financial intermediaries have remained broadly steady over the past decade, reaching an estimated USD 21 trillion in 2023, the share of diverse non-bank exposures has risen over time (Roulet, 2024). The overall quality of the debt of commercial property developers is now declining, amidst tighter financing conditions and weak profitability (Figure 1.26, Panel B). Delinquency rates have also risen, including for office mortgages.

Declines in property prices, rents and credit quality could push up bank non-performing loans and generate losses for non-bank financial intermediaries such as real estate investment trusts (REITs). In turn, these losses could spill over to real estate investment funds holding equity in REITs and trigger redemptions from investment funds. Fire sales of REIT shares would amplify downward price spirals in increasingly illiquid markets, transmit stress to other parts of the financial system, and possibly disrupt the availability of finance to the real economy. Institutional investors are also exposed to subsequent losses through their direct commercial real estate loans, bond holdings and their interconnections with real estate investment funds.

Capital flows into emerging-market economies have picked up this year, supported by solid growth, the improving inflation outlook and enhanced fiscal and monetary policy frameworks (Hardy et al., 2024). Changing investor perceptions about the likely pace of policy rate reductions in the major advanced economies relative to those in many emerging-market economies also helped to support portfolio capital inflows.

Despite this relatively favourable picture, there continue to be risks of much weaker inflows and potential pressures on exchange rates if there is a rapid narrowing of expected interest rate differentials between the emerging-market and advanced economies, particularly the United States, or if geopolitical risks were to increase further. Countries with high sovereign debt and spreads and a large share of USD‑denominated debt are particularly vulnerable to financial volatility in the event of sizeable depreciation or capital outflows.5 There has already been some downward pressure on the currencies of several countries over the past year, especially the ones with relatively high inflation, below-average credit ratings, or comparatively high sovereign bond spreads with the United States, with the unwinding of carry trade positions in August adding further pressure.

Total government debt increased further in 2023 across emerging-market and developing economies, to 69% of GDP, and is projected to reach 75% of GDP on average by 2026 (IMF, 2024b). Many low-income countries are facing significant debt burdens and difficulties in accessing new finance. Elevated interest rates and the strengthening US dollar both weigh on debt sustainability and reduce the resources available for investment, including in growth-enhancing sectors. In total, the debt of low-income countries is estimated to have risen to 53.5% of GDP by the end of 2023, with interest payments exceeding 10% of government revenue on average (IMF, 2024b and World Bank, 2024). The share of low-income countries assessed to be at high risk of debt distress or already in debt distress has risen to more than 50% in 2024 (Figure 1.27).

Another potential risk is that the interlinkages between the government and the domestic banking sector have deepened in some emerging-market economies in recent years. On average, the share of sovereign debt held by domestic banks reached almost 30% by mid-2024, up from 20% in 2004 (Figure 1.28). Investor concerns about unsustainable government debt levels could thus generate sovereign stress that spreads increasingly into the banking sector. In the event of a significant deterioration, tighter borrowing constraints could reduce governments’ ability to support banks through implicit or explicit guarantees, further increasing stress in banks and hampering credit growth.

The Chinese economy is estimated to have contributed over one quarter of global economic growth in 2024 and is expected to make a similar contribution in 2025 and 2026 in the baseline projections. Consequently, developments in China are critical for global growth prospects: for every 1 percentage point that China’s GDP growth falls short of the projection, the direct effect on global growth is estimated to be around 0.2 percentage points, and there could be additional indirect effects via tighter financial conditions and weaker commodity prices. The risks to the projections for China are currently tilted to the downside. Potential further credit events may disrupt the orderly adjustment process in the real estate sector. In turn, this could exacerbate stress in parts of the financial sector and weaken consumer sentiment. Excessive relaxation of demand-side restrictions in the property sector could temporarily result in stronger growth, but also in a further build-up of imbalances and sharper adjustment in the future. An increase in global trade restrictions would slow export growth and industrial activity. In contrast, planned fiscal expansion coupled with more stringent measures to raise spending efficiency may lift the impact of public spending and result in stronger‑than‑projected growth. The reduced mortgage interest burden on households, stemming from recent significant monetary policy easing, may also have an unexpectedly positive impact on consumption growth.

There are several other uncertain factors that could generate positive surprises over the next two years. A swift de-escalation of conflicts in the Middle East could reduce global policy uncertainty and energy prices. Fundamentals in global oil markets currently point to downward pressure on prices, with global oil supply to significantly outpace demand over the forecast period, even if plans by OPEC+ members to unwind curbs in production from the end of 2024 do not materialise (IEA, 2024a). In addition, a resumption of the use of the Suez Canal for global shipping could improve the resilience of global trade to future shocks and would lower shipping costs.

Domestic demand growth could be stronger if household saving rates fall further than expected. Households in many countries still hold excess savings that were initially accumulated at the onset of the pandemic, although much of this will be held by higher-income households with a lower marginal propensity to consume. Nonetheless, household saving rates could fall more sharply than projected if consumer confidence rapidly recovers. Such a scenario could eventuate if consumer food and energy prices decline further or gains in household wealth, stemming from the resumption of real house price increases and the strong growth in equity prices, prompt households to save less of their income. This would strengthen demand growth but might also mean that future inflationary pressures are stronger than would otherwise be the case.

Positive supply shocks could also boost potential output growth, enabling faster expansions than currently projected. For example, private investment growth could respond more vigorously than anticipated to improving financing conditions, especially if corporate hurdle rates for investment ease. There could also be stronger increases in labour force participation rates than projected. Sustained strong inward immigration flows would support such a scenario in many advanced economies, given that immigrants are often more likely to be of working age. As discussed in Chapter 2, there is also capacity in most countries to further increase participation rates among older workers, youth, or women.

In recent months, central banks in most advanced economies have started or continued to reduce policy interest rates, with the notable exception of Japan, where policy accommodation is being withdrawn slowly. Central bank balance sheet reductions have also continued, with their pace adjusted in some jurisdictions, or got underway. The monetary policy stance remains restrictive in most countries, although it is gradually easing. Forward-looking real interest rates are still higher than pre-pandemic norms (Figure 1.29). The cumulative effects of past tightening on economic growth are now past their peak, though the ongoing refinancing of debt at higher rates continues to weigh on many households and companies, especially in countries with large-scale renegotiation of mortgage rates previously set before the start of policy rate increases.

As inflation moderates towards central bank targets, policy rate reductions should continue, but the timing and scope of reductions should be carefully judged to ensure that underlying inflationary pressures are durably contained. Further moderation in nominal wage growth, the absence of a resurgence in unit profits and continued progress in disinflation in services sectors, where cost and price pressures have so far subsided only slowly, will be critical factors that enable monetary policy easing to proceed smoothly.

Under the projected outlook for inflation and GDP growth, policy rate reductions are expected to continue during 2025 and in some cases 2026 in all the major advanced economies other than Japan (Figure 1.30).

• In the United States, reductions in the federal funds rate are projected to continue, with rates being lowered to 3¼-3½ per cent by the first quarter of 2026, when inflation will have largely converged to 2%. Bond holdings are projected to decline further throughout 2025-26, albeit at a slower pace for Treasury securities, as announced in May 2024.

• In the euro area, policy rate reductions are projected to continue this year and the next, lowering the deposit facility rate to 2% towards the end of 2025. The decline in Eurosystem bond holdings is expected to gather speed, with reinvestment of Pandemic Emergency Purchase Programme redemptions being ended as planned from 2025.

• In Japan, the policy rate is projected to increase gradually to 1½ per cent by the end of 2026, as core inflation stabilises around 2% and a negative output gap closes. The government bond holdings of the Bank of Japan are expected to decline, as the bank’s monthly purchases are reduced by about JPY 400 billion per quarter.

• Reductions in policy rates are projected to continue until mid-2025 in Canada and Korea, and until the first half of 2026 in Australia and the United Kingdom. Central bank bond holdings are assumed to decline further in all these countries other than Korea.

By the end of 2026, real policy rates are generally projected to be within estimated ranges for neutral real rates (Figure 1.31) – the real interest rate at which the policy stance is neither accommodative nor restrictive. Inflation is generally expected to be back to target at this time with output gaps projected to be close to zero in most economies. Nominal policy rates are likely to remain at higher levels than before the pandemic, provided inflation settles at target. This would increase the room for monetary policy manoeuvre through conventional tools in the event of an unanticipated slowdown in the economy. Greater room for manoeuvre could also follow if the future neutral rate was to be higher than currently expected, for instance due to reforms to strengthen productivity and investment, including for climate change mitigation and adaptation (Holzmann, 2024), or a larger supply of public debt.

Quantitative tightening (QT) has so far proceeded smoothly, with only a minor upward impact on long-term bond yields and no significant disruptions in the operation of financial markets (BIS, 2024; Du et al., 2024; ECB, 2024b). In particular, the impact on yields has so far been found to be considerably smaller than that of quantitative easing (QE), probably due to much more muted signalling and surprise effects, as QT has not been announced and implemented at times of market stress.6 However, the available evidence largely pertains to periods of policy rate increases. As policy rate reductions gather pace, clear communication will be needed to avoid confusion about the pursuit of two policies (concerning policy rates and balance sheets) with potentially opposite impacts on long-term interest rates and financial conditions in general. Determining when QT should slow and then stop, as the optimal level of central bank reserves is attained, is challenging and needs to take account of risks of liquidity stress and money market interest rate volatility (Lopez-Salido and Vissing-Jorgensen, 2023). Finally, as discussed below, the coexistence of QT with sizeable budget deficits implies that private investors will need to absorb larger net amounts of sovereign bonds than implied solely by the budget deficit.

The fiscal projections for 2025-26 are conditional on announced government measures and OECD assessments of current plans (Annex 1.A). Efforts to consolidate budget positions are now underway in many countries. However, in many countries fiscal tightening is expected to be very modest. Among advanced OECD economies, the projected median improvement in the underlying primary balance is only 0.3% of potential GDP from 2024 to 2026, with all of this occurring in 2026.

• In the United States, a large structural shortfall in government revenue relative to spending is projected to persist in 2025. In 2026, mild fiscal tightening is projected, the underlying primary balance improving by just 0.2% of GDP. This assumes that tax reductions in the Tax Cuts and Jobs Act, currently scheduled to expire at the end of 2025, will broadly be extended.

• In the euro area, an estimated underlying primary deficit of 1.7% of potential GDP in 2024 is projected to decline to 1.1% of GDP by 2026. Most of the improvement is expected to occur next year, reflecting the withdrawal of most remaining energy crisis support. Budget repair plans in some of the area’s larger economies contribute to the projected fiscal tightening in the next two years (Box 1.3). Continued implementation of national recovery and resilience plans is expected to help shield public investment from budget cuts. Sizeable consolidation is expected in France, Italy and to a lesser extent Spain, with only modest fiscal tightening in Germany.

• Japan’s underlying primary deficit is projected to widen slightly in 2025 by 0.3% of potential GDP, partly due to a new economic stimulus package, before narrowing in 2026 to 1.3% of potential GDP. Included in the new stimulus measures are cash handouts to low-income households, renewed energy subsidies, and support for investment in semiconductor production and research and development. On current plans, defence spending is also set to increase, as is support for families with children, partly funded by expenditure reforms.

• Substantial fiscal policy tightening, exceeding 1% of potential GDP, is projected over 2025-26 in Iceland, Israel, Korea, New Zealand, Poland and the United Kingdom. In contrast, a fiscal expansion is expected in Sweden (0.6% of potential GDP). Continued cost-of-living support is expected to contribute to a slight deterioration in Australia’s underlying primary balance next year. In Canada, where new federal income support has recently been announced, the overall fiscal stance is projected to change little over 2025-26.

On current plans, governments in many OECD countries are projected to still be running primary deficits two years from now. Slow progress correcting ongoing budget imbalances will make it harder to stabilise or eventually reduce debt burdens. In some countries – including France, Latvia, the Slovak Republic, the United Kingdom and the United States – large budget deficits appear mostly structural, with any remaining spare capacity at moderate levels or estimated to diminish over 2025-26. The projections show gross general government financial liabilities for OECD countries, as a group, reaching 117% of GDP by the end of 2026, 9 percentage points higher than before the pandemic.

Stronger efforts to contain and reallocate spending and enhance revenues are needed to ensure debt sustainability given the looming fiscal pressures countries face from ageing populations, large investment needs to mitigate and adapt to climate change and planned expansion of defence spending. These should be set within credible medium-term plans, with the pace and nature of adjustment tailored to country-specific circumstances. Provided growth remains solid or picks up in many OECD countries, as projected, and output gaps narrow or turn positive, consolidation efforts should intensify as the monetary policy stance becomes less restrictive. In contrast to most of the past decade – when policy rates in major economies were at or near zero – most central banks are projected to have enhanced capacity to support economies through additional policy rate cuts should growth slow.7

Fiscal policy priorities vary (OECD, 2024a), but in many countries include reforms aimed at encouraging longer working lives – including, in some countries, by raising retirement ages – to help offset budget pressures linked to demographic change. Social policy reforms in many advanced economies are also required to improve welfare targeting. Adjustments to sick leave and disability-related allowances should ensure support is focused on people that need it most while encouraging work. Health system reforms are needed in some countries and could contribute to improved government spending efficiency. Tight fiscal positions in many countries call for reallocation of spending towards activities that support longer-term growth. Tax reforms should aim at broadening tax bases and eliminating distortive tax expenditures while raising proportionally more revenue from indirect taxes. Many countries have scope to boost revenues from taxes on consumption, immovable property, carbon emissions or energy use. Such taxes tend to have smaller detrimental effects on economic activity than taxing wages and business incomes. Upgrades to tax administration and compliance could improve revenue raising capacity.

Sound budgetary frameworks are important to keep fiscal consolidations on track, improve the credibility of fiscal plans and thus reduce uncertainty about the conduct of fiscal policy. Numerical rules for budget balances and debt, with monitoring and analysis by independent agencies, can help keep annual budget planning consistent with medium-term objectives. Spending reviews, when integrated in budget processes, can help governments eliminate waste and navigate trade-offs in the use of public resources.

While interest rate declines lower the potential future cost of debt financing, it will take some time before this shows up materially in countries’ public finances. Debt service costs have already risen substantially since 2021 and are projected to be even higher over 2025-26 in most economies (Figure 1.32), reflecting higher interest rates now than when the maturing debt was issued. In some major economies, governments will need to finance large deficits while central banks continue to shrink their balance sheets, raising the quantity of public debt to be absorbed by domestic private investors or foreign buyers (Figure 1.33). Higher bond yields might be needed to sustain investor demand, especially if clear consolidation plans to ensure debt sustainability are lacking. This could partially offset the effect of monetary policy easing on the costs of new public debt issuance.

Monetary policy paths have continued to diverge across emerging-market economies in recent quarters reflecting increasingly heterogeneous inflation and exchange rate developments. Policy rate reductions have continued in Chile, Colombia and Mexico, and started in Indonesia, Saudi Arabia, South Africa and Thailand. In contrast, rates have so far remained unchanged in India, and have been raised twice in Brazil amidst concerns about the potential impact on inflation expectations from an upturn in inflation amidst strong growth. Key policy interest rates and reserve requirements have declined further in China, as part of the large stimulus package to support the property sector and boost the economy.

The recent differences in monetary policy actions across the major emerging-market economies are in contrast to the simultaneous tightening in most economies as inflation rose in 2021-22 and to some past loosening cycles, where the pace of interest rate cuts was highly synchronised (Figure 1.34, Panel A).

Scope exists to lower policy interest rates in most economies over the next two years, but policymakers should remain vigilant to developments in inflation and the exchange rate, to ensure that inflation returns to target durably. Careful calibration of monetary policy is essential to keep inflation expectations well anchored and avoid disruptive capital outflows. If necessary, rate reductions may need to be slowed, or even reversed temporarily, to ensure price stability.

The expected pace of policy rate reductions varies across countries (Figure 1.34, Panel B):

• Nominal policy rates are projected to be raised further in Brazil in the coming months due to higher inflation, with gradual cuts only from mid-2025 onwards.

• In Chile, Colombia and Mexico interest rate cuts are expected to continue at a steady pace until late 2025 or 2026, taking policy rates to 4.25, 5.5 and 6% respectively, close to neutral levels.

• Modest rate cuts are projected in Indonesia and South Africa, with inflation recently declining somewhat faster than previously anticipated. Rates are also projected to decline in India as inflation eases over the next two years.

• In Türkiye, where inflation remains elevated, the policy rate is projected to remain at 50% until the first quarter of 2025 and then decline to 20% by the latter half of 2026 as inflationary pressures recede.

Recent fiscal developments have also varied across emerging markets. In Brazil, Chile, Costa Rica, South Africa and Türkiye fiscal deficits expanded in 2023, reflecting in some cases the extension of pandemic support measures and increases in pensions and public wages, as well as, for Türkiye, substantial earthquake-related expenditure. In contrast, fiscal balances improved in Bulgaria, Colombia, India and Indonesia (Figure 1.35, Panel A). In several countries deficits are expected to increase in 2024. In China, spending shifts towards infrastructure and direct income support measures have been announced, together with significant additional issuance of local government bonds and steps to ease the debt service burden of local governments. In contrast, the fiscal deficit is projected to decline in Brazil in 2024, even though the policy stance remains expansionary, and automatic indexation of pensions and social benefits continue to put pressure on social expenditure (Figure 1.35, Panel B).

Based on announced fiscal plans, moderate fiscal balance improvements are projected in most countries in 2025-26 (Figure 1.35, Panels C and D). Fiscal deficits are projected to narrow by over 1.5% of GDP in Mexico and Türkiye in 2025, reflecting cuts to public investment (including a reduction in expenditure related to the 2023 earthquake in Türkiye) and in Türkiye increases in tax revenues. Government deficits are also expected to be reduced in Brazil and Colombia next year, although discretionary spending reductions could be required to meet fiscal targets. A consolidation is projected in India in 2025, supported by rising revenues amid a broadening of the tax base. In 2026, further fiscal consolidations are in general expected to be modest, with the exception of South Africa where the government deficit is projected to decline by over 2 percentage points of GDP.

Many emerging-market economies face similar challenges to advanced economies from rising debt and growing debt service pressures. At the same time, emerging-market economies often have larger investment needs in human and physical capital and still insufficient social safety nets. To safeguard the sustainability of the public finances and address new spending pressures, actions are needed to create adequate fiscal space, enhance spending efficiency and improve revenue mobilisation, including reductions in ineffective tax expenditures and steps to broaden the tax base.8 Reforms to help reduce informality also have an important role to play. The pace and type of consolidation needs to remain country‑specific, although countries facing high sovereign spreads will in general face stronger near-term pressures to enact measures that support fiscal credibility. Measures aimed at introducing or enhancing fiscal institutions, including fiscal rules and fiscal councils, could also help in this respect by lowering financing costs and improving fiscal credibility (Caldera Sánchez et al., 2024). Fiscal transparency can also be enhanced by better disclosing the composition of debt and exposures to risks.

Potential output growth has generally weakened across both advanced and emerging economies since the global financial crisis. The latest estimates suggest potential output per capita growth fell by 0.7 percentage points in the median OECD country and 1.1 percentage points in the median G20 emerging-market economy between the 2002-2008 period and 2024 (Figure 1.36). This is despite slightly higher employment rates as more women were integrated into the labour force and working lives were lengthened. About one‑quarter of the reduction in potential output growth per capita in both OECD and non-OECD economies reflects secular declines in the share of the population that is of working age. However, most of the decline is explained by lower growth in the capital stock per worker and trend labour efficiency (which together add up to labour productivity).

Encouragingly, those countries that have been most active in implementing the structural reforms recommended in OECD Going for Growth publications show less of a slowdown in potential GDP per capita growth than other countries (Figure 1.37). The fact that Greece, Portugal and Spain are among the few OECD countries with positive revisions to potential per capita growth (and even larger ones since the post‑global financial crisis period) also suggests that structural reforms accrue benefits over time, as these countries are among those that have reformed the most over the past two decades.

Weaker capital investment has been the predominant factor behind the potential output growth slowdown in the OECD area. In the median OECD country, nearly two-thirds of the 0.7 percentage point decline in potential GDP per capita growth is due to weaker growth of capital per worker. Public policies to encourage private sector investment are needed to revive capital investment and the speed and extent to which new ideas and technologies such as AI spread. Public investment also needs to be preserved, or even strengthened, in important areas with significant market failures. A stable macroeconomic environment with predictable fiscal and monetary policy frameworks is an essential precondition for fostering investor confidence. Strong incentives for firms to grow and innovate are also essential. Competition-friendly product market regulations are particularly important in this regard, along with policies that reduce frictions to the movement of resources to high potential firms, such as those that improve access to finance and insolvency regimes that facilitate the rapid exit of low productivity businesses. Openness to trade and limiting barriers to foreign investment also support competitive markets and facilitate the transfer of new technologies from abroad, particularly in emerging-market economies.

Looking further ahead, demographic trends are expected to become a key factor holding back potential output growth, with the share of the working age population set to further decline in OECD economies (Guillemette and Château, 2023). In the absence of significant policy reforms, this will exacerbate the labour shortages that already exist. The 2024 Employer Survey of Labour Shortages by the Global Forum on Productivity found that 15 to 35% of firms report that all or most of their outstanding vacancies are hard to fill, particularly in Austria, Germany, Norway and Slovenia (Chapter 2). The reasons for such shortages will vary across sectors and countries. In some cases, it may be a lack of available people to meet demand in labour-intensive occupations. Other shortages will stem from skills mismatch, with firms requiring skills in short supply. This points to the need for a broad range of policy reforms to help address structural labour shortages and prevent them persistently weakening economic growth.

Policy measures to tackle labour shortages are set out in detail in Chapter 2, and country-specific recommendations are included in the national country notes of this Outlook in Chapter 3 (summarised in Figure 1.38). Relevant policy considerations include:

• Addressing the evolving skill needs in the economy through education and training policies that ensure strong foundational skills, apprenticeship programmes and vocational education focused on the needs of employers, and participation of adults in high quality life-long training programmes. Encouraging investments in science, technology, engineering, and mathematics education will help economies further adjust to the digital transition in the medium term. At the same time, rising demand in care sectors will further increase the need for training that supports the development of interpersonal and other soft skills.

• Raising participation to bring more people into the labour market, especially women and older workers, at a time when unemployment rates are still close to historical lows in most countries. Adequate childcare support and parental leave, and reforms to improve the incentives to work from the tax/benefit and pension systems, can be important in this respect. In many countries, immigration policies must also be reformed to help attract workers with the required skills and ensure they are successfully integrated into the economy.

• Promoting worker mobility and better labour market matching to reduce structural labour shortages. Ensuring that workers are in the jobs that best match their skills and interests can have substantial productivity payoffs (Adalet McGowan and Andrews, 2015). Regulatory reforms, such as rationalising unnecessary occupational licensing or non-compete clauses, can improve labour mobility. Ensuring that regulations around the housing market and employment protection legislation do not lead to excessive costs of changing jobs or relocating is also important (Causa et. al. 2021). In some high-demand sectors, such as health, elderly care and education, enhancements to job quality by raising wages and improving working conditions will often be required to attract and retain the needed workers.

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Fiscal policy settings for 2025-26 are based as closely as possible on legislated tax and spending provisions and are consistent with the growth, inflation and wage projections. Where government plans have been announced but not legislated, they are incorporated if it is deemed clear that they will be implemented in a shape close to that announced. In 2026, it is assumed that EU countries adopt fiscal policy adjustments which are consistent with the reformed Stability and Growth Pact.

Projections for the EU countries account for spending financed by the Next Generation EU (NGEU) grants and loans, based on expert judgments about the distribution of spending across years and different expenditure categories and informed by officially announced plans where available. NGEU grants are assumed to be budget neutral, and increase both capital tax and transfers receipts and government expenditure. In addition, positive net one-offs are added in order to reflect the discretionary stimulus associated with those grants, as measured by changes in underlying primary balances.

For monetary policy, the assumed path of policy interest rates and unconventional measures represents the most likely outcome, conditional upon the OECD projections of activity and inflation. This may differ from the stated path of the monetary authorities. In the euro area, 10-year sovereign spreads relative to Germany are assumed to remain constant over the projection period at levels close to those observed in September and October.

The projections assume unchanged exchange rates from those prevailing on 14 November 2024: one US dollar equals JPY 155.8, EUR 0.95 (or equivalently one euro equals USD 1.06) and 7.23 renminbi.

The price of a barrel of Brent crude oil is assumed to remain constant at USD 75 until the end of 2026. The TTF natural gas price is assumed to remain constant at EUR 40 MW/h until the end of 2026. Other commodity prices are assumed to be constant over the projection period at their average levels from October 2024. A technical assumption is made that the current disruptions to shipping in the Red Sea persist through 2025 and 2026.

The cut-off date for information used in the projections is 27 November 2024.

OECD quarterly projections are on a seasonal and working‑day‑adjusted basis for selected key variables. This implies that differences between adjusted and unadjusted annual data may occur, though these in general are quite small. In some countries, official forecasts of annual figures do not include working-day adjustments. Even when official forecasts do adjust for working days, the size of the adjustment may in some cases differ from that used by the OECD.