Global GDP is likely to shrink again in Q2. Inflation will rise, and real pain will start to set in. Key industries will be disrupted, dragging down production and consumption. The United States may miss its growth target for 2025, and as a new cross-Atlantic trade war looms, growth may slow in the eurozone as well.
Amid the recent frenzied and erratic tariff announcements by the Trump administration in the United States, the Organisation for Economic Co-operation and Development scaled down its world economic outlook for 2025 and 2026.
The OECD interim report released on March 17 estimates world economy growth will be 3.1 percent in 2025, 0.1 percentage points down from 2024, and that it will drop further to 3.0 percent in 2026. In its previous report, it predicted that both 2025 and 2026 would see 3.3 percent growth, slightly ahead of 2024.
The report blames the lower estimate on a drop in consumer confidence, lingering inflation pressure in some countries and especially the recent tariff measures announced by U.S. President Donald Trump, which have further aggravated global economic fragmentation.
The slowdown varies from country to country because of different effects from Trump’s tariffs. The biggest victim will be Mexico, with GDP growth estimated at -1.3 percent in 2025 and -0.6 percent in 2026, compared with 1.5 percent growth in 2024. Canada will see its growth rate cut in half, to 0.7 percent in both 2025 and 2026, compared with 1.5 percent growth in 2024. China, the largest target of Trump tariffs, will see marginally slower growth, from 5.0 percent in 2024 to 4.8 percent in 2025 and 4.4 percent in 2026.
Ironically, the U.S. itself will be the major victim, with a loss in growth similar to Canada’s but much larger than that of China. According to the OECD report, American economic growth will likely slow to 2.2 percent in 2025, down from 2.8 in 2024, and then slide further to 1.6 percent in 2026.
The European Union, on the other hand, seems more or less stable for the moment. The GDP growth rate in the eurozone will accelerate somewhat over the coming two years, from 0.7 percent in 2024, to 1.0 percent in 2025 and 1.2 percent in 2026. Germany will reverse its negative growth of the past two years and will grow at a rate of 0.4 percent in 2025 and 1.1 percent in 2026.
The report points to India as a global bright spot, accelerating its growth tempo to 6.4 percent in 2025 and 6.6 percent in 2026, higher than the 6.3 percent of 2024.
Based on the U.S. imposing 10 percent tariffs worldwide and the rest of the world matching that in retaliatory tariffs on U.S. goods, the report estimates that, three years out, the world growth rate will be 0.27 percentage points lower than baseline, with larger shortfalls as follows: Mexico (-1.3 percentage points), United States (-0.72), Canada (-0.64), India (-0.6), Japan (-0.35), East Asia (-0.2) and China (-0.1). The OECD average is -0.5.
Inflation will rise globally, the report said. Over the next three years, inflation will jump 0.38 percentage points worldwide and 0.36 percentage higher among OECD countries on average. However, higher inflation will happen in Canada (up 0.9 percentage points), the U.S. (up 0.7) and Mexico (up 0.67). Again, East Asia will be less affected, up just 0.25 percentage points. But China will suffer more, with an inflation jump of 0.31 percentage points.
Even so, the report seems a bit behind the rapid developments in the 10 days following its release. There was a significant escalation in the Trump tariff war. After the announcement of worldwide tariffs, effective on April 2, Trump announced again a permanent 25 percent tariff on automobiles and key parts worldwide, affecting approximately $400 billion in the auto trade and much more trade and manufacturing along the global supply chain. The announcement immediately caused a panic in the stock market, with the NASDAQ off 2.04 percent and the S&P 500 off 1.12 percent. Automaker stock prices suffered badly, with GM off 7 percent and Ford off 4 percent.
Canada and the European Union have already voiced their readiness to retaliate. A new trade war in automotive seems inevitable. To make things worse, the office of the U.S. trade representative held a public hearing on Monday regarding extra service fees on all cargo ships made in China. If this takes effect, it will disrupt a large part of world trade.
The hot words in the market are no longer “economic slowdown” but “Trump recession” and “Trump stagflation.” The Federal Reserve’s Atlanta model showed on March 10 that U.S. GDP will have fallen at a 2.8 percent annual rate in Q1 this year. Bruce Kasman, chief economist of JP Morgan, has lifted the U.S. recession probability to 40 percent. The latest Conference Board consumer confidence index on March 25 showed a sharp fall to 92.9 — 7.2 points lower than the previous month. Consumer expectations for consumption and employment fell 9.6 points to 65.2, its lowest point in 12 years. The indicator, if lower than 80.0, generally points to a recession.
There are great uncertainties ahead. The Trump administration has declared reciprocal tariffs effective on April 2. But it has been extremely vague on what exact tariff rate counts as “reciprocal.” It also said that only 15 percent of its trading partners will be targeted — a seemingly comforting gesture, but it provides no relief. The U.S. has more than 200 trading partners, and 15 percent represents 30 of them. Remember, the top 10 import sources — Mexico, China (including Taiwan), Canada, Germany, Japan, Vietnam, South Korea, Ireland and India combined to account for 68.6 percent of total U.S. imports in 2024. Heavy tariffs on these 10 will cover more than $ 2.2 trillion dollars in goods, the largest tariff overage in world trade history.
The Trump administration has tried to comfort the world by expressing willingness to negotiate. But any negotiation will be filled with great uncertainty as well. In the end, it is likely that the tariff level will be higher than 10 percent each way, thus hurting the world economy even more. The world will start to feel the pain from Q2 2025. Global automotive supply chains, steel and aluminum, chips and other key industries will see growing disruptions, dragging down production and consumption. It’s looking less likely that U.S. GDP growth will hit its 2.2 percent target in 2025. As a new cross-Atlantic trade war is looming, growth in the eurozone could also be scaled down.
The key tone in next OECD report will be more pessimistic. It is urgent that various economies of the world work together to firmly resist unilateral tariffs and uphold the multilateral trading system — which is the only path by which stable economic growth can be maintained for 2025 and the years beyond.
