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The Guardian - UK
The Guardian - UK
Business
Richard Partington Economics correspondent

Trump trade wars are slowing global growth and fuelling inflation, says OECD

Donald Trump speaks in the Oval Office of the White House
Donald Trump’s trade policies will continue to dent output this year and next, the OECD said. Photograph: Rex/Shutterstock

Donald Trump’s trade wars are splintering the global economy and unpicking progress made to reboot growth and tackle inflation, the Organisation for Economic Co-operation and Development (OECD) has said.

In its latest update on the health of the world economy, the leading Paris-based institution downgraded the prospects for global growth this year and next, including a sharp hit to activity in the US, Canada and Mexico.

The OECD cut its forecast for UK growth by 0.3 percentage points this year to 1.4%, and by 0.1 percentage points for 2026 to 1.2%, underscoring the challenge for the chancellor, Rachel Reeves, before next week’s spring statement.

The body representing the world’s richest economies said recent higher levels of economic growth and progress to bring down inflation was being undermined by the fallout from higher trade barriers and mounting geopolitical uncertainty.

Cutting its global growth forecast for this year from 3.3% to 3.1%, it said that significant risks still remained. The global economy grew by 3.2% in 2024.

Higher and broader increases in trade barriers would hit growth and add to inflation, while a climbdown would help reduce uncertainty and strengthen activity.

“Significant risks remain. Further fragmentation of the global economy is a key concern. Higher and broader increases in trade barriers would hit growth around the world and add to inflation,” the OECD said in its interim economic outlook report.

The OECD said: “Governments need to find ways of addressing their concerns together within the global trading system to avoid a significant ratcheting-up of retaliatory trade barriers between countries …

“A broad-based further increase in trade restrictions would have significant negative impacts on living standards.”

Basing its projections on the assumption that Trump pushes ahead with plans to impose 25% tariffs on almost all merchandise imports from Canada and Mexico from April, the OECD said activity would be hit and inflation stoked across all three economies.

It said Mexico would be pushed into a deep recession this year – with output shrinking by 1.3% in 2025 and 0.6% in 2026 – and almost halved its forecasts for growth in Canada.

It reduced its US growth forecasts from 2.5% to 2.2% for this year and from 2.1% to 1.6% in 2026. Growth in China is projected to slow from 4.8% this year to 4.4% in 2026.

In its first report since Trump’s return to the White House in January, the OECD said a further escalation of trade tensions would cause significantly more damage for the world economy.

In a scenario in which 10% blanket tariffs were imposed on all US imports – a threat Trump made on the campaign trail before last November’s election – with a matched response from all trading partners, it said global output could fall by 0.3% within three years relative to its current forecast. The US would be hit significantly, with output declining by 0.7% by the third year and inflation rising by an average 0.7 percentage points a year.

Canada and Mexico would also be affected significantly, reflecting their comparatively open economies and high exposure to the downturn in demand in the US and elsewhere.

With the UK government on the back foot on the economy before next week’s spring statement, Reeves said the OECD report showed the world was already changing in response to mounting trade uncertainty.

“Increased global headwinds such as trade uncertainty are being felt across the board. A changing world means Britain must change too, and we are delivering a new era of stability, security and renewal, to protect working people and keep our country safe,” Reeves said.

“This means we can better respond to global uncertainty, with the UK forecast to be Europe’s fastest-growing G7 economy over the coming years – second only to the US.”

The downbeat OECD assessment comes before an expected UK growth downgrade from the Office for Budget Responsibility (OBR), the independent Treasury watchdog, due alongside next week’s spring statement.

The OBR had previously expected growth of 2% this year and 1.8% in 2026, but official figures and business surveys have since shown output skirting close to zero amid weakness in business and consumer confidence.

Highlighting the pressure on households and the challenge for the government and the Bank of England, the OECD held its predictions for UK inflation at 2.7% this year and 2.3% in 2026.

Last month, the Bank halved its own UK growth forecast for 2025 – from 1.5% to 0.75% because of weakness in household and business confidence. On Friday, official figures showed the UK economy contracted by 0.1% in January.

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