Donald Trump’s trade wars, if sustained, will hit global growth and fuel inflation, the Organisation for Economic Co-operation and Development (OECD) has warned.
In its latest assessment of the global economy, the Paris-based agency downgraded its growth projections for this year and next, to 3.1 per cent in 2025 and 3 per cent in 2026, with higher trade barriers and increased policy uncertainty expected to weigh “on investment and household spending”.
Increased trade costs as a result of tariffs would also eventually feed through into higher prices, “putting additional upward pressure on inflation in many countries and requiring monetary policy to remain restrictive for longer than previously expected,” it said.
Inflation across the G20 group of nations was expected to average 3.8 per cent this year, up from a previous forecast of 3.5 per cent.
On the assumption that the US pushes ahead with plans to impose 25 per cent tariffs on almost all merchandise imports from Canada and Mexico from April, the OECD warned that economic activity would be hit and inflation stoked across all three economies.
It predicted Mexico would be pushed into a recession this year with output shrinking by 1.3 per cent while growth in Canada would be half what was previously projected.
[ EU imposes counter tariffs on €26bn worth of US goods as trade war ramps upOpens in new window ]
The tariff threats also prompted a reduction in US growth forecasts from 2.5 per cent to 2.2 per cent for 2025 and from 2.1 per cent to 1.6 per cent for 2026.
Trump has threatened to apply similar tariffs on goods from the European Union and last week threatened to slap a 200 per cent tariff on wine, cognac and other alcohol imports from Europe as both regions inch closer to an all-out trade war.
The OECD’s growth projection for the euro area for 2025 was a meagre 1 per cent but only on the proviso trade tensions did not intensify further. The agency said “heightened uncertainty” would keep growth in Europe subdued.
“The global economy has shown some real resilience, with growth remaining steady and inflation moving downwards. However, some signs of weakness have emerged, driven by heightened policy uncertainty,” OECD secretary general Mathias Cormann said.
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“Increasing trade restrictions will contribute to higher costs both for production and consumption. It remains essential to ensure a well-functioning, rules-based international trading system and to keep markets open,” he said.
In its report, the OECD said an agreement “that would ease trade tensions, and potentially even lower existing trade barriers, would be welcome and help to improve policy certainty and growth prospects”.
It said higher government spending on defence could support growth in the near-term, “but potentially add to longer-term fiscal pressures”.
The Eurpean Commission and Germany have both announced massive defence spending plans in reponse to the changed security environment.
Germany’s chancellor-in-waiting Friedrich Merz is altering Germany’s strict fiscal rules to massively boost defence spending.
“Central banks should remain vigilant given heightened uncertainty and the potential for higher trade costs to push up wage and price pressures. Provided inflation expectations remain well anchored, and trade tensions do not intensify further, policy rate reductions should continue in economies in which underlying inflation is projected to moderate or remain subdued,” the OECD said.
“Fiscal discipline is needed to ensure debt sustainability, maintain the ability for governments to react to future shocks and accommodate current and future spending pressures,” it said.
