Trump’s tariff fallout? It’s worse than we previously thought, says OECD

The OECD has significantly downgraded its U.S. economic growth forecast for 2025 to 1.6% (from 2.2% in March), citing President Trump's trade war and tariffs as key factors, including retaliatory tariffs, reduced immigration, and federal workforce cuts. Global growth forecasts were also lowered to 2.9% for both this year and next, assuming current tariff levels remain; the OECD anticipates the slowdown to be concentrated in the U.S., Canada, Mexico, and China, with potential inflationary pressures and increased uncertainty weighing on trade and investment.

Analysis

The Organisation for Economic Co-operation and Development (OECD) has significantly downgraded its economic growth forecasts, citing President Trump's trade war as the primary catalyst for anticipated greater economic damage than previously expected. The U.S. economic growth forecast for 2025 has been sharply reduced to 1.6% from the 2.2% projected in March, with even weaker growth anticipated for the subsequent year. This pessimistic outlook is attributed to higher tariffs, including retaliatory tariffs on American exports, a slowdown in net immigration, and a considerable reduction in the federal workforce. Globally, the OECD now projects economic growth to slow to 2.9% for both the current and next year, a downgrade from prior forecasts of 3.1% and 3.0% respectively, contingent on tariffs remaining at mid-May levels. The slowdown is expected to be concentrated in the U.S., Canada, Mexico, and China, all significantly affected by the new tariffs. The OECD report underscores that the current trade environment, marked by erratic tariff implementation and unpredictability, is creating more substantial disruption than the U.S.-China trade tensions of 2018-19, thereby weakening trade, investment, and overall business and consumer confidence. Furthermore, these new levies pose a risk of increased inflation, prompting a call for central bank vigilance, which contrasts with President Trump's pressure on the U.S. Federal Reserve to cut interest rates.

Key Decisions for Investors

• Investors should brace for increased market volatility and downward pressure on global growth expectations, particularly for the U.S., Canada, Mexico, and China.
• Re-evaluate exposure to sectors highly sensitive to international trade and tariffs, and consider a more defensive portfolio posture given the heightened uncertainty and risk of economic slowdown.
• Closely monitor upcoming trade negotiations, tariff implementations, and retaliatory actions, as these will be critical determinants of market sentiment and economic performance.
• Pay keen attention to inflation indicators and central bank policy responses, especially from the U.S. Federal Reserve, as these will significantly influence asset valuations in a tariff-impacted environment.