Trump's Tariffs Are Slowing Down US And Global Economy, OECD Says

The OECD projects a slowdown in global economic growth from 3.3% in 2024 to 2.9% in both 2025 and 2026, citing rising trade costs from U.S. tariffs as a key factor, which are also expected to fuel inflation. The U.S. economy is projected to be significantly impacted, with growth decelerating from 2.8% in 2024 to 1.6% and 1.5% in 2025 and 2026, respectively, and a potential 0.6% drop in American economic output if tariffs are raised by 10% on all other countries. Further tariff increases and retaliatory measures could intensify the slowdown and disrupt supply chains, potentially roiling financial markets and weakening global demand.

Analysis

The Organization for Economic Cooperation and Development (OECD) has issued a stark warning, projecting a significant slowdown in global economic growth from 3.3% in 2024 to 2.9% in both 2025 and 2026. This represents a second consecutive downward revision, now primarily attributed to rising trade costs stemming from U.S. tariffs, which the OECD anticipates will also fuel inflationary pressures. The U.S. economy is forecast to be among the hardest hit, with growth expected to decelerate sharply from 2.8% in 2024 to 1.6% in 2025 and 1.5% in 2026; notably, the U.S. already reported negative GDP growth in Q1 2025 for the first time since 2022. Concurrently, U.S. headline inflation is projected to rise from 2.5% in 2024 to 3.2% in 2025 before moderating to 2.8% in 2026, with a caution that inflation may prove more persistent. Other major economies, including Canada, Mexico, and China, are also expected to experience decelerated growth, with China's expansion slowing from 5% in 2024 to 4.3% in 2026. The OECD underscores that an escalation of the tariff situation, involving further U.S. tariff hikes—such as an additional 10% on all countries potentially reducing global output by 0.3% and U.S. output by 0.6% within two years—and retaliatory measures, could intensify the slowdown, disrupt supply chains, roil financial markets, prolong policy uncertainty, and weaken global commodity demand. This outlook is characterized by a general sentiment score of -0.75 (strongly negative) and a market impact score of 0.65, reflecting a pessimistic tone and significant potential market repercussions, as OECD Secretary-General Mathias Cormann noted a shift to a 'more uncertain path' for the global economy.

Key Decisions for Investors

• Investors should consider adopting a more cautious and defensive portfolio stance given the OECD's downward revisions to global and U.S. economic growth, coupled with rising trade tensions and inflation forecasts.
• It may be prudent to reassess exposures to sectors and regions highly sensitive to U.S. trade policies, tariffs, and potential supply chain disruptions, particularly those concentrated in the U.S., Canada, Mexico, and China.
• Closely monitor developments in international trade disputes, particularly U.S. tariff policies and retaliatory actions, as these are pivotal drivers for the projected economic slowdown and increased market volatility.
• Consider strategies for hedging against persistent inflation, as the OECD projects U.S. inflation to rise significantly in 2025 before moderating, potentially impacting real returns on investments.