Trade war cuts global economic growth outlook: OECD

New Straits Times

3 days ago

PARIS: The OECD slashed its annual global growth forecast on Tuesday, warning that US President Donald Trump's tariffs blitz will stifle the world economy – hitting the United States especially hard.
After 3.30 per cent growth last year, the world economy is now expected to expand by a "modest" 2.90 per cent in 2025 and 2026, the Paris-based Organisation for Economic Co-operation and Development said.
In its previous report in March, the OECD had forecast growth of 3.10 per cent for 2025 and 3.00 per cent 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 on Tuesday and Wednesday, with US and EU trade negotiators expected to hold talks on the sidelines of the gathering after Trump threatened to hit the European Union with 50 per cent tariffs.
The Group of Seven advanced economies is also holding a meeting focused on trade.
"For everyone, including the United States, 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 per cent 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 per cent tariffs on cars and now plans to raise those on steel and aluminium to 50 per cent on Wednesday.
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 United States.
The US economy is now expected to grow by just one per cent six tenths (1.60) this year, down from two per cent two tenths (2.20) in the previous outlook, and slow further to one per cent five tenths (1.50) 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 two per cent in 2024 to 15.40 per cent, 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 3.60 per cent in 2025 and 3.20 per cent in 2026, the United States is "an important exception".
US inflation is expected to accelerate to just under four per cent by the end of the year, two times higher than the Federal Reserve's target for consumer price increases.
The OECD slightly reduced its growth forecast for China – which was hit with triple-digit tariffs that have been temporarily lowered – from 4.80 to 4.70 per cent this year.
Another country with a sizeable downgrade is Japan: the OECD cut the country's growth forecast from 1.10 to 0.70 per cent.
The outlook for the eurozone economy, however, remains intact with one per cent 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.