OECD lowers global outlook as Trump trade war hits US growth

By Leigh Thomas

PARIS (Reuters) -Global economic growth is slowing more than expected only a few months ago as the fallout from the Trump administration's trade war takes a bigger toll on the U.S. economy, the OECD said on Tuesday, revising down its outlook.

The global economy is on course to slow from 3.3% last year to 2.9% in 2025 and 2026, the Organisation for Economic Cooperation and Development said, trimming its estimates from March for growth of 3.1% this year and 3.0% next year.

But the growth outlook would likely be even weaker if protectionism increases, further fuelling inflation, disrupting supply chains and rattling financial markets, the Paris-based organisation said in its latest Economic Outlook.

"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% 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.

U.S. President Donald Trump's tariff announcements since he took office in January have already 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% duties on the European Union until July 9.

The OECD forecast the U.S. economy would grow only 1.6% this year and 1.5% 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 sizeable cut as the organisation had previously expected the world's biggest economy would grow 2.2% this year and 1.6% 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.

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 8% of economic output by 2026, among the biggest fiscal shortfalls for a developed economy not at war.

As tariffs fuel inflation pressures, the Federal Reserve was seen keeping rates on hold through this year and then cutting the fed funds rate to 3.25-3.5% 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 programme 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% this year and 4.3% in 2026, little changed from previous forecasts for 4.8% in 2025 and 4.4% in 2026.

The outlook for the euro area was unchanged from March with growth forecast this year at 1.0% and 1.2% next year, boosted by resilient labour markets and interest rate cuts while more public spending from Germany would buoy 2026 growth.

(Reporting by Leigh Thomas; Editing by Chizu Nomiyama and Susan Fenton)