Trade war cuts global economic growth outlook, says OECD

Free Malaysia Today

2 days ago

US President Donald Trump has imposed 25% tariffs on cars and now plans to raise those on steel and aluminium to 50% tomorrow. (AP Pic)
PARIS : The Paris-based Organisation for Economic Co-operation and Development (OECD) slashed its annual global growth forecast today, warning that US President Donald Trump's tariff blitz will stifle the world economy, hitting the US especially hard.
After 3.3% growth last year, the world economy is now expected to expand by a 'modest' 2.9% in 2025 and 2026, the OECD said.
In its previous report in March, the OECD had forecast growth of 3.1% for 2025 and 3% for 2026.
Since then, Trump has launched a wave of tariffs that has rattled financial markets.
'The global outlook is becoming increasingly challenging,' said the OECD, an economic policy group of 38 mostly wealthy countries.
It said 'substantial increases' in trade barriers, tighter financial conditions, weaker business and consumer confidence, and heightened policy uncertainty will all have 'marked adverse effects on growth' if they persist.
The OECD holds a ministerial meeting in Paris today and tomorrow, with US and EU trade negotiators expected to hold talks on the sidelines of the gathering after Trump threatened to hit the EU with 50% tariffs.
The Group of Seven advanced economies is also holding a meeting focused on trade.
'For everyone, including the US, the best option is that countries sit down and get an agreement,' OECD chief economist Alvaro Pereira said in an interview with AFP.
'Avoiding further trade fragmentation is absolutely key in the next few months and years,' Pereira said.
Trump imposed in April a baseline tariff of 10% on imports from around the world.
He unveiled higher tariffs on dozens of countries but has paused them until July to allow time for negotiations.
The US president has also imposed 25% tariffs on cars and now plans to raise those on steel and aluminium to 50% tomorrow.
US slowdown
In the OECD report, Pereira warned that 'weakened economic prospects will be felt around the world, with almost no exception'.
He added that 'lower growth and less trade will hit incomes and slow job growth'.
The outlook is particularly gloomy for the US.
'The US economy is now expected to grow by just 1.6% this year, down from 2.2% in the previous outlook, and slow further to 1.5% in 2026,' the OECD said.
'This reflects the substantial increase in the effective tariff rate on imports and retaliation from some trading partners,' the OECD said.
'The effective tariff rate on US merchandise imports has gone from 2% in 2024 to 15.4%, the highest since 1938,' the OECD said.
The OECD also blamed 'high economic policy uncertainty, a significant slowdown in net immigration, and a sizeable reduction in the federal workforce'.
While annual inflation is expected to 'moderate' among the Group of 20 economies to 3.6% in 2025 and 3.2% in 2026, the US is 'an important exception'.
US inflation is expected to accelerate to just under 4% by the end of the year, two-times higher than the Federal Reserve's target for consumer price increases.
Rising risks
The OECD slightly reduced its growth forecast for China – which was hit with triple-digit tariffs that have been temporarily lowered – from 4.8% to 4.7% this year.
Another country with a sizeable downgrade is Japan, the OECD cut the country's growth forecast from 1.1% to 0.7%.
The outlook for the euro zone economy, however, remains intact with 1% growth.
'There is the risk that protectionism and trade policy uncertainty will increase even further and that additional trade barriers might be introduced,' Pereira wrote.
'According to our simulations, additional tariffs would further reduce global growth prospects and fuel inflation, dampening global growth even more,' he said.