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The OECD warns that Donald Trump’s trade war has “significant sacrifices” to the global economy.
Global growth this year and next year will slow from 3.2% last year to 3.1% and 3% in 2025 and 2026 respectively, but inflation will be more sticky than previously expected, the Paris-based OECD said in its tentative outlook to avoid the country “avoiding ratchets of retaliatory trade barriers.”
The US GDP growth will slow from 2.8% last year to 2.2% this year and 1.6% in 2026, the OECD said. He predicted that higher trade barriers will contribute to sustained inflation and that the Federal Reserve will not change interest rates until mid-2026.
“The message reveals that trade uncertainty and economic policy uncertainty are at a significant cost,” OECD chief economist Alvaro Pereira told The Financial Times.
Analysis – The OECD’s first attempt to quantify economic drag from the early rounds of Trump’s trade war suggests that G20’s growth outlook remains intact as investments are postponed due to policy uncertainty and consumers are narrowed down to higher commodity prices.
The biggest growth downgrade comes from Canada and Mexico after Trump’s decision to collect 25% tariffs on most imports from US neighbours. Canada’s growth forecast has been more than half to 0.7% this year and next year, but Mexico is expected to be in a complete recession this year again, with 1.3% contracted.
“Consumer trust has collapsed in quite a few countries, particularly Canada, Mexico, the US and a few others,” Pereira said.
According to the OECD, a surprise revival of inflation or growth could lead to a “rapid re-rick” in financial markets.
This year, US growth is 0.2 percentage points slower than the previous OECD, and half of 2026 will be weaker than previous forecasts. These forecasts still leave the US as the fastest growing G7 economy in both years.
Instead of slowing down as previously predicted, inflation will speed up from 2.5% last year to 2.8% in 2025. Currently, core inflation exceeds central bank targets in many countries in 2026, including the US, is projected to exceed central bank targets in many countries, including the US.
The growth forecasts for the largest three eurozone economies have been trimmed, with the currency area projected to expand by 1% in 2025 and by 1.2% in 2026. The UK’s growth forecast was reduced to 1.4% this year and to 1.2% in 2026.
Despite Trump’s imposing an additional 20% tariff on China, the OECD lifted the outlook for Asian countries in 2025, with growth at 4.8% and 4.4% in 2026.
In contrast, Japan’s growth forecast is silenced by 0.4 percentage points this year to 1.1 percentage points, with India’s growth half percentage points lower than previously forecast of 6.4 percent.
“Governments need to find ways to address concerns within the global trade system to avoid the significant ratchet of retaliatory trade barriers between the world,” the OECD said. “A wider further increase in trade restrictions will have a significant negative impact on standard of living.”
The organization sketches a “negative scenario” in which the US will further increase tariffs in all countries at 10% points, and will impose a comparable retaliatory action on the US. Global GDP levels will be lowered by 0.3% with the second and third years of the shock, the OECD said, with global inflation rising 0.4 percentage points per year.
US consumers will be hit hard, worth more than $1,600 in actual net disposable income per household. Interest rates should increase percentage points compared to the OECD’s central forecast for the first three years, but the effective US exchange rate will rise by 1.7%.
The OECD said it saw a “significant risk” first. “Further fragmentation of the global economy is a key concern,” he added. “A higher and wider increase in trade barriers will grow worldwide and increase inflation.”
Data visualization by Keith Frey
