The Organization for Economic Co-operation and Development (OECD) has released a report indicating a lowered outlook for US economic growth due to rising tariffs. This new assessment suggests that the country’s growth rate could drop to 1.6% in 2025 and 1.5% in 2026, a noticeable decline from the 2.8% GDP mark achieved last year.
The OECD credits this reduced growth forecast to several factors. Key contributors include increased effective tariff rates on imports, retaliatory measures from some trading partners, economic policy uncertainties, net immigration slowdowns, and a reduced federal workforce.
Moreover, the report forecasts a rise in annual headline inflation, expecting it to reach 3.9% before tapering off, influenced largely by increased import prices stemming from these tariffs. This isn’t entirely surprising, though, as rising costs often lead to inflationary pressures.
Meanwhile, the Trump administration is currently pushing to maximize the country’s offers in light of looming tariff deadlines.
The OECD’s analysis highlights a concerning bias in growth forecasts, which leans towards negative outcomes, including a deeper than expected slowdown in economic activity due to ongoing policy uncertainties. They also note potential upward pressures on prices tied to increasing tariffs and shifts in major financial markets.
The report details how US trade policies have evolved dramatically since February, with new tariffs and trade restrictions being either announced, reversed, delayed, or adjusted, causing reactions from various trading partners.
According to the forecast, President Trump’s tariffs, which took effect in mid-May, are projected to remain in place until at least 2026. The OECD specifies that the effective tariff rate on imports from China has climbed by about 30%, while average tariff rates from other trading partners have increased by approximately 10%.
This represents a significant escalation in average effective tariff rates, which have soared above 15% from a previous figure of around 2.5%, marking the highest level since World War II. New tariffs might spur domestic production, yet they also elevate import costs, impacting consumer budgets adversely.
In further projections, the Congressional Budget Office (CBO) has suggested that proposed House settlement bills may increase the federal budget deficit by $2.3 trillion over the next decade.
The report indicates that if inflation expectations remain stable, the Federal Reserve could consider loosening financial policies and cutting interest rates in response to reduced inflation. However, the federal government is on alert for a growing budget deficit, expected to climb from approximately 7.5% of US GDP in 2024 to over 8% by 2026. Public debt relative to GDP is also anticipating a rise to 100% by the close of 2026.
The OECD notes that while increased tariff revenue and spending cuts from a shrinking federal workforce may help mitigate the deficit, these benefits will likely be counteracted by slower revenue growth tied to weaker economic performance.
Additionally, the impending fiscal package aims to extend various provisions of the 2017 Tax Cuts and Jobs Act and recalibrate personal and corporate tax rates, while increasing defense and border security spending and reducing Medicaid expenditures. The OECD warns that this package could account for the majority of the projected increase in the deficit-to-GDP ratio for 2026.
