Trump trade war to sap Canadian, Mexican and US growth, OECD says

[PARIS] President Donald Trump’s tariff hikes will drag down growth in Canada, Mexico and the United States while driving up inflation, the OECD forecast on Monday (Mar 17), cutting its global economic outlook and warning that a broader trade war would sap growth further.

In the case of a generalised trade shock, not only will US households pay a high direct price, but the likely economic slowdown will cost the United States more than the extra income the tariffs are supposed to generate, the Organisation for Economic Cooperation and Development (OECD) estimated in its interim outlook.

Global growth is on course to slow slightly from 3.2 per cent in 2024 to 3.1 per cent in 2025 and 3.0 per cent in 2026, the Paris-based policy forum said, cutting its projections from 3.3 per cent for both this year and next in its previous economic outlook, issued in December.

But the global picture masked divergences among major economies with resilience in some big emerging markets like China helping to make up for a marked slowdown in North America.

The proliferation of tariff hikes would weigh on global business investment and boost inflation, leaving central banks little choice but to keep interest rates higher for longer than previously expected, the OECD said.

The organisation updated its forecasts assuming tariffs between the United States and its neighbours are raised an extra 25 percentage points on almost all goods imports from April.

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As a result, US economic growth was seen slowing this year to 2.2 per cent before losing more steam next year to only 1.6 per cent, the OECD said, cutting its forecasts from 2.4 per cent and 2.1 per cent previously.

But the Mexican economy 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.

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With less direct exposure to the trade war for now, the euro area economy was seen gaining momentum this year with 1.0 per cent growth and reaching 1.2 per cent next year, although that was down from previous forecasts for 1.3 per cent and 1.5 per cent respectively.

Stronger government support for Chinese growth would help offset the impact of higher tariffs in the world’s second-biggest economy, the OECD said, forecasting 4.8 per cent growth in 2025 – up from 4.7 per cent – before slowing to 4.4 per cent in 2026 – unchanged from the previous estimate.

However, the OECD said the global outlook would be much worse if Washington escalates the trade war by raising tariffs on all non-commodity imports and its trade partners do the same.

It estimated an increase in bilateral tariffs permanently by 10 percentage points would shave around 0.3 percentage points off global growth by the second and third years of the shock, while global inflation would be on average 0.4 percentage points higher over the first three years.

In such a scenario, the US economy would suffer a significant hit, with growth 0.7 percentage points lower than what it otherwise would have been by the third year. The direct cost to US households could be as much as US$1,600 each.

The financial cost from the economic drag from tariffs would also offset any extra income they generate for the public coffers, which means they would be insufficient to pay for lowering other taxes as the US administration has planned. REUTERS