OECD points to potential economic icebergs ahead

THE latest Global Economic Outlook by the Organisation for Economic Co-operation and Development (OECD) rightly highlighted the resilience of the US and wider global economy in 2025. Yet, it also pointed to significant remaining potential icebergs on the horizon, especially US President Donald Trump’s tariffs, that could change the economic narrative in a “fragile” 2026 and beyond.

Yale University Budget Lab researchers estimated that the overall average effective US tariff rate for imports has jumped to some 16.8 per cent. This is the highest since the Great Depression of the 1930s, and a sharp increase from the roughly 2.4 per cent at the start of 2025.

The OECD report adds to concerns that a combination of legal uncertainty over the tariffs (currently being reviewed by the US Supreme Court); potential further retaliation to the US tariffs; and ongoing geopolitical challenges remains an underappreciated test for the global economy.

There is also the possibility of further US increases or broader changes in trade barriers. This sets up a potentially pivotal period ahead at a time when many stock markets remain at historically elevated levels.

In recent months, US stocks have made more gains compared to other international indices than almost any other period since the 20th century. Harvard Professor Gita Gopinath estimated that a significant market crash could result in some US$35 trillion being wiped off US and wider global markets.

Impact of Trump’s tariffs not fully felt yet

The report noted that US companies are still making significant use of inventories and/or profit margins to absorb the initial impact of Trump’s tariffs.

However, despite the generally healthy underlying economic context, the report highlighted that the full impact of these economic measures is yet to be felt. It argued, for instance, that “tariffs are affecting demand, and will continue to weigh on trade volumes as announced tariffs come into full effect”.

The risk to labour markets has been flagged by wider surveys beyond the OECD’s, including the Institute for Supply Management’s November study of factory conditions which highlighted higher levels of concern about US employability levels.

Another example is the impact on consumer expectations for future inflation which feeds into confidence. Many more US citizens are now concerned that tariffs will raise prices for everyday goods, and this acts as a restraint on household consumption.

The OECD asserts that higher tariffs will help keep inflation above the Federal Reserve’s target in 2026, averaging 3 per cent, making it harder to ease interest rates. This too may act as a brake on business investment.

Of course, Trump administration officials forecast renewed US strength ahead. Unquestionably, the US economy has multiple formidable advantages – including a secure supply of energy, and a powerful science and technology base.

Markets have also generally taken the Trump tariffs in their stride since the initial market gyrations after the shock of April’s “Liberation Day” announcements. After that period of huge volatility, aftershocks have lessened in the second half of 2025.

However, it is far from sure that this relative calm will continue indefinitely. Even before Trump returned to the Oval Office, the International Monetary Fund had noted a growing disconnect between higher geopolitical risk and lower market volatility.

This indicates that asset prices may not fully reflect the potential impact of factors such as trade tariffs. Such a disconnect makes shocks potentially more likely, because higher geopolitical and/or geoeconomic tension could trigger faster sell-offs in financial markets and prompt volatility to snap back as it catches up to such uncertainty.

In such scenarios, some financial institutions may be forced to sell assets or deleverage balance sheets to meet margin calls or satisfy risk limits, potentially exacerbating market sell-offs.

Impact for Asia, including Asean

Multiple long-run estimates assert a significant hit to US gross domestic product and the loss of hundreds of billions in potential dynamic revenue as economic activity contracts. Yet, the impact is far from restricted to US shores.

The OECD report highlighted that rising trade restrictions between the US and other countries, including in Asia, could “inflict significant damage” on global output and supply chains. This has the potential to backtrack years of work on this agenda.

Even some critics of the Trump tariffs believe that many of the tariff measures may outlive his second administration – driven by political concerns that removing protectionist barriers will worry workers who fear losing their jobs.

Already, former president Joe Biden – from 2021 to 2025 – kept much of the tariff regime that Trump put in place during his first term of office, including towards China.

Unchecked, the results could be a significantly different global economic system – especially if more countries retaliate against the Trump tariffs.

The impact would not only be lower volumes of international trade, but also smaller capital flows, and slower growth in productivity and living standards worldwide. The consequences include smaller foreign capital flows to the US, and slower US investment spending. Innovative US companies will grow less speedily, and global productivity growth is likely to slow.

Moreover, world living standards are likely to post smaller increases too. More capital will flow to other markets, including Asean as well as Japan and South Korea. This should spark more innovation and growth in these markets and beyond – including Europe.

However, it is not yet clear what the potential benefits will be for these countries because they will also experience downside effects from a less dynamic US economy.

Less trade, less confidence in global markets, less innovation, fewer economies of scale and softer demand from the world’s largest economy are likely to reduce prosperity – not just in the US, but much of the rest of the world too.

This is why 2026 is shaping up to be such a key period. The consensus forecast is slower, robust growth built upon economic resilience. However, despite the forecast, the risk of hitting icebergs is growing; with a non-trivial possibility, this outlook could be upended.

The writer is an associate at LSE IDEAS at the London School of Economics