PARIS – US President Donald Trump’s aggressive trade policies have abruptly set the world onto a path of slower growth and higher inflation that could worsen notably if tensions escalate, the Organisation for Economic Co-operation and Development (OECD) said.
The Paris-based club of 38 rich countries cut its outlook for most members and predicted the pace of global expansion to slow to 3.1 per cent this year and 3 per cent in 2026 as barriers restrain commerce and surging uncertainty holds back business investment and consumer spending. It previously forecast growth of 3.3 per cent for both 2025 and 2026 in December.
Nations currently in the eye of the trade storm may see even sharper decelerations.
US economic growth was seen slowing in 2025 to 2.2 per cent – versus 2.4 per cent in the OECD’s earlier estimate – and would lose more steam in 2026, with growth now estimated at 1.6 per cent, down from 2.1 per cent previously. This would be the weakest since 2011 aside from the initial Covid pandemic hit suffered in 2020.
The Mexican economy, meanwhile, would be hit hardest by the tariff hikes, contracting 1.3 per cent this year and a further 0.6 per cent next year instead of growing 1.2 per cent and 1.6 per cent as previously expected.
Canada’s growth rate would slow to 0.7 per cent this year and next, well below the 2 per cent previously forecast for both years.
China should also prove more resilient this year as domestic policy support offsets the impact of tariffs, but the OECD expects growth to slow in 2026.
For now, European economies are facing fewer direct effects from trade wars, the OECD said. But it still cut forecasts for the region to reflect the impact of uncertainty.
Increased costs of commerce will also fuel stronger inflation than expected just three months ago, requiring central banks to keep restrictive policies for longer, the OECD said. In many countries, including the US, core price increases will remain above policymakers’ targets in 2026.
The outlook is the most comprehensive attempt yet from an international organisation to quantify the damage from fast-evolving trade wars. While Mr Trump was expected to ratchet up tensions after taking office, the volatility and size of his threats have wrong-footed both policymakers and investors.
Last week, US stocks fell into a correction with the S&P 500 plunging 10 per cent from a peak in mid-February. Mr Trump has acknowledged the country faces “a period of transition” due to his attempt to radically rewire global trade, but dismissed the threat of a recession and downplayed the market turmoil.
The OECD’s analysis accounts for measures already taken between China and the US, as well as Washington’s broad-based 25 per cent tariffs on steel and aluminum imports. It is also based on an assumption of a 25 percentage point increase in levies on Canadian and Mexican goods, and an equivalent retaliation from those countries.
The calculations don’t account for any of the other threats Mr Trump has made, including a pledge of global reciprocal tariffs. He said earlier on March 17 he will make good on that threat on April 2, as well as imposing sectoral levies.
According to an illustrative simulation by the OECD, in which bilateral tariffs are permanently raised by 10 percentage points, global output could fall by around 0.3 per cent by the third year. It said the US would take a “significant hit,” with a 0.7 per cent decline in output.
Inflation would also be stronger in that scenario, prompting central banks to tighten policy and sparking “disruptive repricing” in financial markets. Such risks and heightened uncertainty mean monetary officials must remain vigilant to wage and price pressures, the OECD said.
“We are pointing to significant downside risks including when it comes to further trade fragmentation or increased trade tensions,” OECD secretary general Mathias Cormann said in an interview with Bloomberg Television. “If further decisions in the same directions will be made down the track then of course we would have to revise our assessments.”
Still, the OECD said there are some upside risks to its gloomier outlook should tariffs be lower and policy more stable. Higher defence spending, as Europe has pledged in recent weeks, could also support growth, although it would add to pressure on government finances.
For economic output and living standards, “having well-functioning global markets, having a rules-based trading system in good working order is still the best recipe,” Mr Cormann added. BLOOMBERG, REUTERS
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