U.S. tariffs slow global economy and boost inflation

[UNITED STATES] The Organisation for Economic Co-operation and Development (OECD) has released a sobering report on the global economic outlook, highlighting the significant impact of U.S. tariff increases on worldwide growth and inflation. As trade tensions escalate and policy uncertainty persists, the OECD projects a slowdown in global economic expansion and a concerning rise in inflationary pressures.

Global Economic Outlook: A Downward Trend

The OECD's latest forecast paints a picture of decelerating growth across major economies. Global GDP growth is expected to decline from 3.2% in 2024 to 3.1% in 2025, with a further dip to 3.0% projected for 2026. This downward revision reflects the cumulative effect of trade barriers, geopolitical tensions, and policy uncertainties that are hampering investment and consumer spending worldwide.

U.S. Economy: Brakes Applied to "Very Strong Recent Pace"

For the United States, the economic powerhouse that has been a driving force behind global growth, the outlook is particularly concerning. The OECD projects that U.S. GDP growth will decelerate from its robust recent performance, dropping to 2.2% in 2025 and further declining to 1.6% in 2026. This represents a significant downgrade from previous estimates, with the 2026 projection slashed by a substantial 0.5 percentage points.

North American Impact: Canada and Mexico Bear the Brunt

The repercussions of U.S. tariff policies are expected to be even more severe for its North American trading partners. Canada's economic growth forecast has been dramatically reduced to just 0.7% for both 2025 and 2026, a sharp decline from the previous projection of 2% for each year. Mexico faces an even grimmer outlook, with the OECD now predicting a contraction of 1.3% in 2025, followed by a further 0.6% decline in 2026.

Inflationary Pressures: A Global Concern

As trade barriers rise, so too does the specter of inflation. The OECD warns that price increases are likely to be higher than previously anticipated, although they may ease slightly as economic growth cools. In the United States, headline inflation is now projected to reach 2.8% in 2025, up from the December estimate of 2.1%. This inflationary trend is not confined to the U.S., with G20 economies expected to see average inflation rates rise to 3.8%, up from earlier forecasts.

The Tariff Effect: A Double-Edged Sword

The OECD's projections are based on the assumption that tariffs between the U.S. and its North American neighbors will increase by an additional 25 percentage points on nearly all imported goods starting in April. While these tariff hikes may generate additional revenue for the implementing governments, they come at a significant cost to global economic activity, incomes, and regular tax revenues.

OECD Secretary-General Mathias Cormann emphasized the delicate balance at play: "The global economy has shown some real resilience, with growth remaining steady and inflation moving downwards. However, some signs of weakness have emerged, driven by heightened policy uncertainty. Increasing trade restrictions will contribute to higher costs both for production and consumption. It remains essential to ensure a well-functioning, rules-based international trading system and to keep markets open."

Trade War Scenarios: A Gloomy Forecast

The OECD report outlines potential scenarios should trade tensions escalate further. If bilateral tariffs were to be raised on all non-commodity U.S. imports, with retaliatory measures from trading partners, global output could fall by approximately 0.3% within three years. Simultaneously, global inflation could rise by an average of 0.4 percentage points per year over the initial three-year period.

Market Reactions and Economic Implications

Financial markets have already begun to react to the uncertainty surrounding trade policies. Recent weeks have seen stock markets tumble into correction territory, reflecting growing concerns about the economic impact of tariffs. The uncertainty has also made businesses globally hesitant to invest, which is crucial for stimulating economic growth.

Policy Recommendations and Future Outlook

In light of these challenges, the OECD has outlined several key policy priorities:

Central Bank Vigilance: Monetary authorities must remain alert to the heightened uncertainty and potential for trade costs to exacerbate inflationary pressures.

Fiscal Responsibility: Governments need to take decisive fiscal actions to ensure debt sustainability and create room for responding to future economic shocks.

Structural Reforms: The OECD recommends ambitious reforms to enhance productivity, improve market competition, and reduce excessive regulatory burdens on firms.

Technology Adoption: Emphasis on education, skills development, and the adoption of new technologies, including artificial intelligence, to revive productivity.

Global Implications and Sectoral Impact

The ripple effects of U.S. tariff policies extend far beyond North America. The European Union is projected to see modest growth, with forecasts of 1.0% in 2025 and 1.2% in 2026, though these figures have been revised downward. China, despite increased government support for economic growth, is expected to see a slowdown to 4.4% growth by 2026.

Certain sectors are likely to feel the impact more acutely. Agricultural exporters, for instance, may find themselves diverting products to alternative markets where trade is less expensive, potentially leading to increased competition in those regions.

Consumer Impact and Market Dynamics

For consumers, the tariff increases translate to higher prices on imported goods, potentially dampening demand and affecting consumer spending patterns. This inflationary pressure, combined with slower economic growth, creates a challenging environment for households and businesses alike.

As the global economy grapples with the fallout from escalating trade tensions, the path forward remains uncertain. The OECD's report serves as a stark reminder of the interconnectedness of the world's economies and the far-reaching consequences of trade policies.

While the immediate outlook may appear gloomy, the OECD's recommendations provide a roadmap for policymakers to navigate these turbulent economic waters. By focusing on structural reforms, embracing technological advancements, and maintaining a commitment to open markets, nations can work to mitigate the negative impacts of trade barriers and foster a more resilient global economy.

As businesses and consumers adapt to this new economic landscape, staying informed and agile will be key to weathering the storm and emerging stronger on the other side of these trade-induced challenges.