Key Takeaways:
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- Higher U.S. tariffs are expected to reduce global economic growth to 3.1% in 2025 and 3% in 2026, down from earlier forecasts of 3.3% for both years.
- Mexico and Canada face the largest economic downgrades due to their heavy trade reliance on the U.S., with Mexico’s economy now forecast to contract by 1.3% in 2025.
- Global inflation is projected to rise by 0.3 percentage points due to tariffs, potentially slowing central bank rate cuts and further dampening growth.
- The OECD warns that additional tariff increases could further harm global output, reduce U.S. household incomes, and widen fiscal deficits.
What Happened?
The OECD released a report warning that higher U.S. tariffs on imports are set to slow global economic growth and increase inflation. The global economy is now forecast to grow by 3.1% in 2025 and 3% in 2026, down from earlier projections of 3.3%. Mexico and Canada, the U.S.’s largest trading partners, face the steepest downgrades, with Mexico’s economy expected to shrink by 1.3% in 2025. The report assumes a 25-percentage-point tariff increase on imports from North America and a 20-percentage-point tariff on Chinese goods. The OECD also highlighted the potential for further tariff hikes, which could provoke retaliation and deepen the economic slowdown.
Why It Matters?
The tariff increases are expected to have widespread economic consequences, including slower growth, higher inflation, and reduced real incomes. For the U.S., the OECD estimates that household incomes could drop by 1.25% three years after additional tariff hikes, equivalent to a $1,600 loss per household. While tariffs may generate revenue for the U.S. government, the economic slowdown could reduce tax revenues overall, potentially widening the fiscal deficit. Globally, higher inflation could force central banks to delay interest rate cuts, creating additional headwinds for growth. For businesses and investors, the uncertainty surrounding trade policy and its impact on global supply chains remains a significant risk.
What’s Next?
The OECD cautions that further tariff increases, including President Trump’s proposed “reciprocal duties,” could exacerbate the global economic slowdown. Investors will closely monitor the April 2 announcement on potential new tariffs. Central banks, including the Federal Reserve, are expected to maintain cautious monetary policies, with the Fed likely keeping interest rates at 4.25%-4.5% until well into 2026. Meanwhile, China’s growth forecast has been slightly raised to 4.8% for 2025, as government stimulus measures are expected to offset the impact of tariffs. In Europe, Germany’s economic outlook could improve if planned infrastructure and defense spending materialize under its new government.
