(Illustrative photo: Getty Images)

The Organization for Economic Co-operation and Development (OECD) has revised its global economic growth forecasts downward, from 3.2% in 2024, to 3.1% in 2025, and  3.0% in 2026.

Impacts of the tariff war

The OECD attributes these downward revisions to escalating trade tensions in several G20 economies, along with increasing geopolitical and policy uncertainties that put pressure on investment and household spending. It projected that inflation will remain higher than previously expected, as production costs in many economies rise due to supply chain disruptions.

OECD Secretary-General Thomas Cormann said changes in US trade policy since President Donald Trump returned to office on January 20, particularly Trump’s tariff war against major economic partners, are having a significant impact on the global economy. The OECD forecasts that US economic growth will slow to 2.2% this year and 1.6% next year, down from previous projections of 2.4% this year and 2.1% next year. In the event of a full-scale trade war with multiple partners, the US can expect a growth rate of 0.7% and American households could face increased costs of up to 1,600 USD per household.

The US’s two largest economic partners, Canada and Mexico, are experiencing negative effects from Trump’s imposition of 25% tariffs. Canada's growth is expected to decelerate to 0.7% for both 2025 and 2026, down from a forecast of 2% for both years.

The Eurozone expects 1% growth, down from an earlier projection of 1.3%. That figure could go lower if the tariff war with the US escalates following EU retaliation against US aluminum and steel tariffs.

If its trade conflict with the US remains under control, China – the world’s second-largest economy – will maintain its forecast growth rate of 4.8%. Mr. Cormann said trade conflicts benefit nobody, and urged nations to prioritize dialogue over trade restrictions.

“My message to the governments all around the globe is that it will be important for future growth and for future increases in incomes and living standards. It would be important to keep markets open. It will be important to have well functioning global markets and the rules by striding system in good working order, to the extent that there are issues in the global trading system are best resolved through dialogue and international cooperation,” said Cormann.

The OECD said an increase in tariffs of 10 percentage points that provoked retaliation would reduce global economic output by 0.3% from 2026.

Political instability

In its Global Economic Outlook Report released late last year, the OECD maintained a cautiously optimistic stance on global economic growth while emphasizing risks related to geopolitical instability. In its latest report, the OECD placed even greater emphasis on this factor, saying that, alongside trade barriers, geopolitical uncertainty remains the primary risk to global growth.

Rebecca Christie, an expert at the Bruegel Institute in Brussels, said Europe has yet to develop an effective strategy to respond to the new US policies. Europe has primarily been reacting to US actions rather than formulating a long-term plan, said Christie.

“We should look for what he actually does, what his actions are, and not just react to every single thing that he says is going to happen. So for Europe having to pick and choose what is in Europe's interest and what will work for Europe rather than just having a knee-jerk response that will be the right way to go,” said Christie.

Recent developments in the Russia-Ukraine conflict and the US administration’s approach to handling the situation have also created uncertainties for businesses in Europe.

Oliver Roth of ODDO BHF, a financial services group in Paris, said the US’s push for high-level direct talks with Russia to seek a resolution to the conflict is a positive signal. But the market expectations could backfire if these diplomatic efforts fail.

“The world is closely watching the phone call between President Trump and President Putin, as it carries political significance for the Ukrainian people and could also mark a crucial step toward economic stability in Europe, if the parties can at least agree on an initial ceasefire," said Roth.

Observers note that, with little likelihood of an early resolution to the ongoing tariff disputes between the US and its economic partners, prolonged geopolitical instability will continue to weigh on global growth in the foreseeable future.