Trump trade war to sap Canadian, Mexican and US growth, OECD says

By Leigh Thomas

PARIS (Reuters) - President Donald Trump's tariff hikes will drag down growth in Canada, Mexico and the United States while driving up inflation, the OECD forecast on Monday, cutting its global economic outlook and warning that a broader trade war would sap growth further.

In the case of a generalised trade shock, not only will U.S. households pay a high direct price, but the likely economic slowdown will cost the United States more than the extra income the tariffs are supposed to generate, the Organisation for Economic Cooperation and Development estimated in its interim outlook.

Global growth is on course to slow slightly from 3.2% in 2024 to 3.1% in 2025 and 3.0% in 2026, the Paris-based policy forum said, cutting its projections from 3.3% for both this year and next in its previous economic outlook, issued in December.

But the global picture masked divergences among major economies with resilience in some big emerging markets like China helping to make up for a marked slowdown in North America.

The proliferation of tariff hikes would weigh on global business investment and boost inflation, leaving central banks little choice but to keep interest rates higher for longer than previously expected, the OECD said.

The organisation updated its forecasts assuming tariffs between the United States and its neighbours are raised an extra 25 percentage points on almost all goods imports from April.

As a result, U.S. economic growth was seen slowing this year to 2.2% before losing more steam next year to only 1.6%, the OECD said, cutting its forecasts from 2.4% and 2.1% previously.

But the Mexican economy would be hit hardest by the tariff hikes, contracting 1.3% this year and a further 0.6% next year instead of growing 1.2% and 1.6% as previously expected. 

Canada's growth rate would slow to 0.7% this year and next, well below the 2% previously forecast for both years.

TRADE WAR FALLOUT

With less direct exposure to the trade war for now, the euro area economy was seen gaining momentum this year with 1.0% growth and reaching 1.2% next year, although that was down from previous forecasts for 1.3% and 1.5% respectively.

Stronger government support for Chinese growth would help offset the impact of higher tariffs in the world's second-biggest economy, the OECD said, forecasting 4.8% growth in 2025 - up from 4.7% - before slowing to 4.4% in 2026 - unchanged from the previous estimate.

However, the OECD said the global outlook would be much worse if Washington escalates the trade war by raising tariffs on all non-commodity imports and its trade partners do the same.

It estimated an increase in bilateral tariffs permanently by 10 percentage points would shave around 0.3 percentage points off global growth by the second and third years of the shock, while global inflation would be on average 0.4 percentage points higher over the first three years.

In such a scenario, the U.S. economy would suffer a significant hit, with growth 0.7 percentage points lower than what it otherwise would have been by the third year. The direct cost to U.S. households could be as much as $1,600 each.

The financial cost from the economic drag from tariffs would also offset any extra income they generate for the public coffers, which means they would be insufficient to pay for lowering other taxes as the U.S. administration has planned.

(Reporting by Leigh Thomas; Editing by Hugh Lawson)