OECD says Trump’s tariff hikes will hurt global economy, drive inflation much higher

The Organization for Economic Cooperation and Development (OECD) expects Trump’s tariff hikes on imports to slow economic growth worldwide and push inflation to much higher levels, according to a report released on Monday. The report slashes growth forecasts for nearly all major economies in 2025 and 2026.

The report now projects Mexico’s economy to shrink by 1.3% this year and 0.6% in 2026, a huge reversal from earlier estimates that had Mexico growing by 1.2% and 2.8%. Canada’s growth forecast was cut to 0.7% for both 2025 and 2026, down from 2% previously. The U.S. economy is also expected to slow, with growth now pegged at 2.2% this year and 1.6% next year, lower than the earlier 2.4% and 2.1% projections. Both countries are victims of Trump’s aggressive tariffs.

Tariffs to rise, trade partners to face heavy costs

The OECD’s forecast assumes that tariffs on imports from Mexico and Canada will rise by 25 percentage points starting next month. China will continue to face 20 percentage point tariffs on its exports to the U.S., along with higher duties on steel and aluminum.

In its Monday report, the OECD warned that Trump’s trade policies would likely lead to retaliation from affected countries, which would further damage the global economy.

Alvaro Pereira, OECD’s chief economist, pointed out how the uncertainty surrounding Trump’s trade policies is already affecting global markets. “We’re already seeing high trade uncertainty and economic policy uncertainty,” Pereira said. “This is already having an impact on confidence. We have downgraded almost every single country.”

The global economy is now forecast to grow by 3.1% in 2025 and 3% in 2026, slightly down from previous estimates of 3.3% for both years, according to the OECD’s report.

Inflation and U.S. households to take a hit

If Trump imposes new tariffs of 10 percentage points and other nations respond with their own trade barriers, the OECD projects that global economic output will shrink by 0.3% in 2026. The report also warns that these policies will drive up consumer prices, cutting real incomes in the U.S. by 1.25% over the next three years. That translates to an average $1,600 loss per household.

Despite generating additional tariff revenue for the U.S. government, the OECD says that the economic slowdown will reduce tax revenue from other sources, making it unlikely that tariffs will cover the losses. “Additional tax increases or lower fiscal expenditure are needed to keep the overall budget deficit unchanged,” the OECD stated.

Inflation is expected to rise by a third of a percentage point across the world’s largest economies due to Trump’s tariffs, which could cause central banks to delay interest rate cuts. Pereira said that if inflation worsens, central banks will be forced to take a cautious approach in their decision-making.

The OECD now expects the Federal Reserve to keep interest rates at 4.25% to 4.5% well into 2026, a shift from its earlier forecast that had rates dropping to 3.25% to 3.5% by early 2026.

China sees small boost, eurozone struggles

The OECD slightly raised its growth forecast for China, now predicting 4.8% growth in 2025, up from 4.7% previously. The group says that China’s economic stimulus measures will help offset the impact of U.S. tariffs on Chinese exports.

Meanwhile, growth forecasts for the eurozone and Germany were lowered. However, the OECD noted that its projections do not yet reflect expected increases in Germany’s defense and infrastructure spending under incoming leadership. The government led by Friedrich Merz is set to expand spending on infrastructure, which could improve the outlook for Europe’s largest economy.

“Germany has had an infrastructure gap for a long time,” said Pereira. “They definitely need to spend more.”

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