Global economic outlook: Trump tariffs upend global growth

"Global economic prospects are weakening" the OECD said in a report published on June 3, pointing to an array of factors such as substantial barriers to trade, tighter financial conditions, and heightened policy uncertainty which are projected to have adverse effects on growth. The Organisation has lowered its global economic growth forecasts for 2025 from 3.1 per cent to 2.9 per cent, with a smaller downward revision for 2026.

 

 

Trump's tariffs and their unpredictability are leading to global growth downgrades, with the US facing more severe impacts than other nations. GDP growth in the US is projected to decline from 2.8 per cent in 2024 to 1.6 per cent in 2025 and 1.5 per cent in 2026. In the Eurozone area growth is projected to pick up very modestly from 0.8 per cent to 1 per cent and China's growth will decelerate moderately from 5 per cent to 4.7 per cent in 2025 and 4.3 per cent in 2026. Overall, with a few exceptions like Australia being one of them, most OECD countries will experience declining growth this year and the next year.

 

 

While some regions like Latin America and the Caribbean, and the Middle East and North Africa, are projected to experience a growth pickup, others like East Asia and Pacific are expected to see a slowdown, reflecting varying economic conditions across different parts of the world. The deteriorating economic outlook is further undermining progress towards the Sustainable Development Goals (SDG), many of which are already off the track.

 

For a developing country like Bangladesh, a slowdown in economic activity resulting from the trade war will cause tighter financial conditions creating further fiscal stress with increased debt payment liabilities. Trump tariffs may disrupt the established approach to manufacturing-led development in countries such as Bangladesh.

 

 

Trump's trade policy shifts have the potential to undermine economic growth, risk higher prices and disrupt production and distribution networks. Slower growth and persistent cost of living pressures risk rising unemployment and poverty, deepening inequalities and disproportionately burdening low-income households. As trade disruptions lead to slowdown in growth, Bangladesh needs to go for ambitious structural policy reforms that will foster economic competitiveness and growth.

 

 

OECD Chief Economist Alvaro Pereira said in the report's introduction, "Weakened economic prospects will be felt around the world, with almost no exception". He also told CNBC, "The reason why we downgraded almost everybody in our forecast is that trade uncertainty and economic policy uncertainty have reached unprecedented levels.'

 

 

OECD Secretary General Mathias Cormann noted that although the global economy showed resilience in late 2024, it is now becoming more fragile due to unresolved trade disputes, geopolitical tensions, and increased fiscal pressures.

 

 

The OECD report indicates that Trump's trade war will impact the US most significantly, with China, Canada, and Mexico also affected. Economic slowdown will be concentrated in these four countries. Canada achieved 1.5 per cent GDP growth last year, and now expected to post only 1 per cent this year with similar growth figure for the next year. Mexico's growth was 1.5 per cent last year, slowing to 0.4 per cent this year, and predicted to recover to 1.1 per cent next year.

 

 

Inflation has been easing but is now resurfacing in some economies including the US. The OECD is forecasting a US inflation rate rise to 3.9 per cent by the end of the year from the current level of 2.3 per cent. This situation may present a challenge for the Federal Reserve, which is likely to delay interest rate cuts until there is more clarity on the impact of tariffs despite pressures from President Trump to cut the cost of borrowing. Additionally, consumer spending, which makes up approximately two-thirds of US economic activity, may decline as tariffs lead to higher prices. A slowdown in economic activity will lead to increased unemployment.

 

 

 

The report additionally noted that increased trade costs, particularly in nations implementing higher tariffs, will contribute to inflation. Now business analysts and Fed Chair Jerme Powell have also raised concerns that Trump tariffs may cause what is described as "stagflation", a situation where there is high inflation coupled with slow economic growth, often accompanied by high unemployment. It's essentially a combination of economic stagnation and inflation.

 

 

There is also uncertainty regarding the measures that countries affected by tariffs may take in response. Some retaliatory tariff measures have already been taken by China and the EU. If tariffs and counter-tariffs remain, global supply chains may be disrupted, affecting both developed and developing economies. Even the US, the architect of these trade measures is not immune to their effects.

 

 

Global trade for the past 80-plus years has been operating under the "Most Favoured Nation" clause. This principle in international trade ensures that a country grants identical trading terms, such as tariffs or other benefits, to all other countries with MFN status, as it does to its most favoured trading partner. This ensures non-discrimination and equal access to markets.

 

 

The MFN clause is a cornerstone of the World Trade Organisation (WTO) system. The first article of the GATT also applies to GATS and TRIPS. In fact, trade has been one of the engines of growth and prosperity during this period bringing close to a billion people out of poverty.

 

 

Trump has discarded MFN, creating uncertainty about the outcome of his tariffs. An import tariff is both a consumption tax on imported goods and a production subsidy for domestic suppliers at the same rate. Tariffs create barriers to market exchanges which in turn create economic inefficiency and result in consumer welfare loss.

 

 

The OECD forecasts indicate that Trump's tariff measures show a limited understanding of trade. His trade policy does not appear to consider the broader impacts on the global economy, including his own country. These policy shifts have the potential to undermine global economic growth, affect consumer sentiment, risk higher prices and disrupt production and distribution networks.

 

 

In his view tariffs can simultaneously fix US's trade deficit, enhance its competitiveness, stimulate domestic investment and innovation and create employment. But the view is certainly very fanciful as all these can not be achieved simultaneously just by imposing tariffs.

 

 

In effect, Trump's vision of recreating the last century's manufacturing in today's US would entail creating a high-cost manufacturing with low-cost goods that the country imports now. This cannot be a rational economic argument to impose tariffs. Trump has little understanding or appreciation for benefits of open and free trade.

 

 

There is still uncertainty about what the eventual outcome of tariffs might be. Frequent changes in tariffs have continued even in recent weeks creating further uncertainty. However, now as the Trump tariff regime remains a work in progress until the end of 90 days pause, the full impact of the trade war will not be clear until the later months of this year and that could be more damaging than the report envisaged.

 

 

Trump has imposed tariffs on nearly every country in the world. The report stated that global trade growth is expected to slow significantly over the next two years due to tariff increases and uncertainty affecting business investment. The report pointed out, "A reversal of increase in trade barrier would support growth and reduce inflation, even if it did not immediately result in lower policy uncertainty".

 

 

The global economy is at a precarious moment. Trump's insistence on implementing tariffs will heighten trade tensions and harm global trade and growth, affecting both the US and other economies. So, other countries should refrain from retaliating with their own tariffs, because to do so will be to replicate Trump's error and raise the risk of an escalating trade war. It is important to keep markets open to preserve the economic benefits of rule-based competitive global trade flows which will ultimately lead to growth.

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