OECD Warns Trade Wars Could Stifle Growth in US, UK, Canada, and Mexico

In its latest interim economic outlook, the Paris-based organisation cut its UK growth forecast by 0.3 percentage points to 1.4% for 2025 and by 0.1 points to 1.2% for 2026, underscoring the challenges facing Chancellor Rachel Reeves ahead of next week’s spring statement.

Global Economy Under Pressure

The OECD lowered its global growth projection for 2025 from 3.3% to 3.1%, following a 3.2% expansion in 2024. It cited rising trade barriers, mounting geopolitical uncertainty, and the risk of further protectionist measures as key threats.

“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. The organisation stressed that governments must collaborate within the global trading system to avoid retaliatory measures that could harm living standards.

Impact on North America

Assuming Trump implements 25% tariffs on most merchandise imports from Canada and Mexico starting in April, the OECD predicts sharp economic impacts. Mexico is projected to enter a deep recession, with output falling 1.3% in 2025 and 0.6% in 2026. Canada’s growth forecast was nearly halved, while U.S. growth was trimmed from 2.5% to 2.2% for 2025 and from 2.1% to 1.6% for 2026.

A further escalation, such as a 10% blanket tariff on all U.S. imports with retaliatory measures from trading partners, could reduce global output by 0.3% within three years. The U.S. could see output decline 0.7% and inflation rise by an average of 0.7 percentage points annually, with Canada and Mexico also heavily affected due to their economic exposure to the U.S. market.

China and Global Implications

China’s growth is forecast to slow from 4.8% in 2025 to 4.4% in 2026. The OECD warned that prolonged trade tensions could undermine global growth, fuel inflation, and jeopardise recent progress in stabilising economies post-pandemic.

UK Outlook

Chancellor Reeves said the OECD report highlighted the challenges posed by global uncertainty. “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,” she said. Reeves added that the UK is expected to become Europe’s fastest-growing G7 economy over the coming years, second only to the U.S.

The OECD held UK inflation forecasts at 2.7% for 2025 and 2.3% for 2026. The UK’s Office for Budget Responsibility (OBR) is expected to announce a similar growth downgrade alongside the spring statement, following a contraction of 0.1% in January and weak business and consumer confidence.

The Bank of England recently halved its UK growth forecast for 2025, from 1.5% to 0.75%, reflecting subdued household and business sentiment.