OECD Economic Outlook, Volume 2026 Issue 1

GDP growth is projected to remain around 2% in 2026 before moderating to 1.8% in 2027. While the energy shock and heightened uncertainty stemming from the evolving conflict in the Middle East are expected to sap household consumption growth, underlying growth remains supported by strong AI-related investment. Productivity growth has strengthened, while employment growth has slowed markedly. Higher energy prices will drive a sharp but temporary rise in inflation. Risks are tilted to the downside: a sustained increase in oil prices would weigh further on economic activity, while elevated equity valuations and vulnerabilities in private credit markets pose additional risks. At the same time, the recent pickup in labour productivity growth could prove more durable than assumed.

The target range for the policy rate is expected to remain constant at 3.5% to 3.75%, though rate increases may be warranted if inflationary pressures prove more persistent than anticipated. The budget deficit remains historically large, at over 7% of GDP, and will continue to grow. Sustained fiscal consolidation will be needed to contain demand pressures and place the debt ratio on a stable path. Removing bottlenecks to investment in electricity generation, distribution and storage would support energy security.

Economic activity in the United States remained resilient through the first quarter of 2026 despite a succession of adverse shocks, including higher tariffs, tighter immigration policies, and a contraction in the federal workforce. Output growth moderated to a quarterly annualised average of 2% since the beginning of 2025, broadly in line with estimated potential, as enormous AI-related investment and robust private consumption—supported by elevated equity valuations and concentrated among higher-income households—offset weakening labour market dynamics. Employment growth has slowed notably over the past year plus, yet the unemployment rate has remained broadly stable, reflecting a reduced “breakeven” pace of job creation as labour force growth has waned. At the same time, productivity growth has strengthened modestly above its historical average and well above its pre-pandemic average (a period of similar GDP growth), likely driven by the capital deepening linked to AI-related investment.

More recent high-frequency indicators have been mixed following the onset of the conflict in the Middle East in late February. Headline inflation, already running above target, picked up sharply through April, reflecting both energy price pressures and pass-through from higher food and transportation costs. Already subdued consumer sentiment has sunk further. At the same time, retail sales data through April suggest that real consumption growth is holding up, despite soft growth in real disposable personal income, as the saving rate has fallen to an unusually low level. Fuel exports to Europe and Asia have surged amid supply disruptions and higher global energy prices. In February, the Supreme Court invalidated the Administration’s use of the International Emergency Economic Powers Act to impose broad tariffs, resulting in its removal and an order to issue refunds to affected businesses. Following this ruling, the Administration invoked Section 122 of the Trade Act of 1974 to impose a 10% global tariff, which is being challenged in court and expires in July unless extended by Congress. Nevertheless, the average effective tariff rate on US imports has fallen from 14% before the Supreme Court’s ruling to 9.6% after it, where it is assumed to remain throughout 2026 and 2027. Monthly net tariff revenue, which had already begun to decline from its peak of USD 31 billion before the Supreme Court ruling because of the unwinding of front-loading and a shift to lower-tariffed goods, fell further to USD 22 billion in April 2026 and is expected to continue to fall over the next several months as the Treasury issues tariff refunds.

Following the energy price shock, the Federal Open Market Committee has indicated its willingness to raise the policy rate should significant spillovers occur or evidence arise that inflation expectations have become unanchored. With only modest spillover effects expected and with year-over-year core PCE inflation beginning to fall back towards its 2% target later this year, the target range for the policy rate is projected to remain steady at 3.5% to 3.75%, a roughly neutral stance.

After narrowing somewhat to 7.3% of GDP in 2025, the deficit is expected to expand to 8% of GDP this year as further cuts to discretionary non-defence spending are more than offset by: the net deficit-expanding measures associated with the 2025 One Big Beautiful Bill Act (OBBBA); tariff refunds; an expected boost to defence spending; and fast-growing spending on health care and pensions. As issuance of tariff refunds tails off, the deficit narrows slightly in 2027 but remains elevated. In turn, general government gross public debt as a percentage of GDP will rise from 126% to 131% between 2025 and 2027, one of the highest debt ratios in the OECD.

GDP growth is projected to slow over the next couple of quarters before gradually recovering. Private consumption growth is expected to remain subdued in the near term, despite a temporary boost from larger-than-usual tax refunds under the OBBBA, as higher energy prices erode real disposable income gains amid soft payroll growth. As gasoline prices ease and employment growth strengthens, consumption growth is projected to recover. Despite elevated input costs and geopolitical tensions, investment growth remains resilient, supported by very strong AI-related capital spending and more favourable tax treatment of investment. The energy price shock is set to push year-over-year headline PCE inflation sharply higher, peaking around 4% in mid-2026 before declining as energy prices fall back. Core inflation is projected to step up temporarily, reflecting spillovers from energy and past tariff increases, before gradually returning to target by end-2027 as slack emerges in the economy.

Risks to the projection are tilted to the downside. A sustained increase in oil and gas prices stemming from the evolving conflict in the Middle East would weigh more heavily on activity than currently assumed, despite some offset from higher domestic energy production. Elevated equity valuations leave financial markets vulnerable to a reassessment of risk, particularly in technology sectors, while specific financial pressures—notably in private credit—raise the risk of financial stress. On the upside, recent improvements in labour productivity growth could prove more durable than assumed, supporting stronger output growth without adding to inflationary pressures. Tariff policy is unusually uncertain, and the risks are two-sided. Tariffs that were invalidated by the Supreme Court could be reimposed under other statutes (such as Section 232 or 301), potentially at higher rates. Alternatively, the average effective tariff rate could fall if the 10% global tariff is not extended beyond July or invalidated.

Reducing the large fiscal deficit and stabilising the debt ratio should be a priority given the high debt ratio. This would help lower long-term interest rates and narrow the current account deficit. Achieving steady medium-term fiscal consolidation will require addressing structural spending pressures, notably in health care. Strengthening price regulation and competition in health, expanding value-based payment models, and enhancing care coordination and prevention would help contain cost growth while maintaining or improving outcomes. Enhancing domestic energy security and resilience remains essential. Ageing grid infrastructure, permitting delays and rising exposure to extreme weather events pose risks to reliable supply. Streamlining permitting and expanding investment in electricity generation, grid infrastructure and storage—while preserving market-based incentives—would support resilience and diversification.