US tariff increases to slow global economy, boost inflation, OECD says

In a quarterly report published Monday, the Paris-based research body cut its growth forecasts for most of the world’s largest economies over this year and next, the main exceptions being China, Argentina and Turkey.

Its largest downgrades were reserved for the two economies that trade most heavily with the U.S. and face significantly higher barriers to their exports. The OECD now expects Mexico’s economy to contract by 1.3% this year and 0.6% in 2026, having previously forecast growth of 1.2% and 2.8%.

For Canada, it now expects growth of 0.7% in both 2025 and 2026, having previously forecast expansions of 2%.

The OECD said the U.S. economy will now likely grow by 2.2% this year and 1.6% next. It previously forecast growth of 2.4% and 2.1%.

“We’re already seeing high trade uncertainty and economic policy uncertainty," said Alvaro Pereira, the OECD’s chief economist. “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, having previously been projected to expand by 3.3% in each year.

Those forecasts assume that tariffs on almost all imports to the U.S. from its North American neighbors will be increased by 25 percentage points from early next month, while an increase in tariffs on Chinese imports of 20 percentage points will remain in place, as will higher duties on aluminum and steel imports.

However, future increases in tariffs are likely. President Trump has threatened to impose so-called reciprocal duties on any trading partner that charges tariffs or imposes other trade barriers on U.S. products, with an announcement due April 2.

The OECD said fresh increases in taxes on imports would do further harm to the global growth outlook and U.S. prospects. It said an increase in tariffs of 10 percentage points that provoked retaliation would reduce global economic output by 0.3% from 2026.

With consumer prices rising at a faster rate, the OECD said real incomes in the U.S. would be 1.25% lower three years after the fresh tariff increase, equivalent to a loss of $1,600 for the average household.

While the tariffs would raise additional revenue for the U.S. government, the OECD warned that would be more than offset by lower revenues from other taxes as the economy slows, “implying that additional tax increases or lower fiscal expenditure are needed to keep the overall budget deficit unchanged."

Even without further increases, the OECD forecast that inflation across the world’s largest economies will be a third of a percentage point higher this year and next as a result of higher tariffs. That could lead central banks to cut borrowing costs more gradually than would otherwise have been the case, another headwind for growth.

“If some countries face additional pressures, we would not be surprised if central banks become more cautious," said Pereira.

The OECD now expects the Federal Reserve to keep its key interest rate at current levels of 4.25% to 4.5% until “well into 2026." It had previously expected the Fed to lower its key rate to between 3.25% and 3.5% by the first quarter of 2026.

The research body raised its growth forecast for China in 2025 to 4.8% from 4.7%, since it expects recent efforts by the government to stimulate activity will more than offset the impact of higher tariffs on the country’s exports to the U.S..

The OECD lowered its growth forecasts for the eurozone, and Germany in particular. But those new projections don’t take into account plans to increase spending on defense and infrastructure under an incoming government that is likely to be led by Friedrich Merz. Should those plans come to fruition, the outlook for the currency area’s economy would improve.

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

Write to Paul Hannon at paul.hannon@wsj.com