Canadian economy will be among those hit hardest by global slowdown, says OECD

CBC

2 days ago

Global economic growth is slowing more than was expected only a few months ago, as the fallout from the Trump administration's trade war continues, the OECD said on Tuesday, and Canada is among the countries where the downturn is most concentrated.
The Organization for Economic Co-operation and Development (OECD) revised down its outlook, trimming its estimates from March for growth of 3.1 per cent this year and 3.0 per cent next year. The global economy is on course to slow from 3.3 per cent last year to 2.9 per cent in 2025 and 2026, it said.
"The slowdown is concentrated in the United States, Canada, Mexico and China, with other economies expected to see smaller downward adjustments," the Paris-based organization said in its latest economic outlook.
The growth outlook would likely be even weaker if protectionism increases, further fuelling inflation, disrupting supply chains and rattling financial markets, it added.
"Additional increases in trade barriers or prolonged policy uncertainty would further lower growth prospects and likely push inflation higher in countries imposing tariffs," OECD Secretary General Mathias Cormann said as he presented the report.
If Washington raised bilateral tariffs by an additional 10 percentage points on all countries, as compared with the rates in force as of mid-May, global economic output would be about 0.3 per cent lower after two years, Cormann added.
"The key policy priorities in this context are constructive dialogue to ensure a lasting resolution to current trade tensions," Cormann said.
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Canadian economic growth could slow to 1% this year
The OECD projects that Canada's economic growth will slow from 1.5 per cent in 2024 to 1.0 per cent in 2025 and 1.1 per cent in 2026 because of trade tensions with the U.S., long its largest export market.
The organization also expects that business investment and exports will decline this year, and that a weak labour market will weigh on Canadian households' spending behaviour.
Headline inflation will tick up slightly, though the impact of higher tariffs on consumer prices will be partly offset by lower gas prices, which the organization attributes to the end of the consumer carbon tax.
It also notes that core inflation — the Bank of Canada's preferred measure for tracking price growth — will increase "for a period," before coming back down toward the central bank's two per cent target next year.
"Inflationary pressures from higher tariffs will require a more cautious approach to lowering interest rates," the report said. The rate currently sits at 2.75 per cent, with the bank's next meeting set for Wednesday.
"Increased government spending, particularly on housing affordability and new social programs, has recently worsened the general government balance, although it had previously been in surplus."
OECD warns about tariff impact in U.S.
Since taking office in January, U.S. President Donald Trump's tariff announcements have roiled financial markets and fuelled global economic uncertainty, forcing him to walk back some of his initial stances.
Last month, the U.S. and China agreed to a temporary truce to scale back tariffs, while Trump also postponed 50 per cent duties on the European Union until July 9.
The OECD forecast the U.S. economy would grow only 1.6 per cent this year and 1.5 per cent next year, assuming for the purpose of making calculations that tariffs in place mid-May would remain so through the rest of 2025 and 2026.
For 2025, the new forecast marked a sizable cut, as the organization had previously expected the world's biggest economy would grow 2.2 per cent this year and 1.6 per cent next year.
While new tariffs may create incentives to manufacture in the United States, higher import prices would squeeze consumers' purchasing power and economic policy uncertainty would hold back corporate investment, the OECD warned.
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Meanwhile, the higher tariff receipts would only partly offset revenues lost due to the extension of the 2017 Tax Cuts and Jobs Act, new tax cuts and weaker economic growth, it added.
Trump's sweeping tax cut and spending bill was expected to push the U.S. budget deficit to eight per cent of economic output by 2026 — among the biggest fiscal shortfalls for a developed economy not at war.
As tariffs fuel inflation pressures, the U.S. Federal Reserve was seen keeping rates on hold through this year and then cutting the fed funds rate to 3.25 to 3.5 per cent by the end of 2026.
In China, the fallout from the U.S. tariff hikes would be partly offset by government subsidies for a trade-in program on consumer goods like mobile phones and appliances and increased welfare transfers, the OECD said.
It estimated the world's second-biggest economy, which is not an OECD member, would grow 4.7 per cent this year and 4.3 per cent in 2026, little changed from previous forecasts for 4.8 per cent in 2025 and 4.4 per cent in 2026.
The outlook for the euro area was unchanged from March, with growth forecast this year at 1.0 per cent and 1.2 per cent next year, boosted by resilient labour markets and interest rate cuts, while more public spending from Germany would buoy 2026 growth.