Trump’s trade wars tip world to slower growth, says OECD

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 3.0 per cent in 2026 as barriers restrain commerce and surging uncertainty holds back business investment and consumer spending.

Nations currently in the eye of the trade storm may see even sharper decelerations, with Canada’s growth rate tumbling to less than half the OECD’s December prediction, Mexico entering a recession, and the annual expansion in the US wilting to 1.6 per cent next year -- the weakest since 2011 aside from the initial pandemic hit suffered in 2020. 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 increase will remain above policymakers’ targets in 2026.

The outlook is the most comprehensive attempt yet from an international organization to quantify the damage from a fast-evolving trade war. While 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. 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 aluminium 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 Trump has made, including a pledge for global reciprocal tariffs, or last week’s proposal to hit EU wine with 200 per cent 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.

“Further fragmentation of the global economy is a key concern,” the organisation said. “Higher and broader increases in trade barriers would hit growth around the world and add to inflation.”

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 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.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.