OECD Warns Full Effects Of High U.S. Tariffs Yet To Be Felt

(RTTNews) - The Organisation for Economic Co-operation and Development said in a report on Tuesday that the full impact of the massive hike in trade tariffs announced by the U.S. is yet to be felt though early effects are becoming increasingly evident.

In the interim outlook report, the Paris-based think tank raised the global growth forecast to 3.2 percent from 2.9 percent, citing the better-than-expected economic resilience in the first half of the year. Thus, a modest slowdown from the 3.3 percent expansion in 2024 is projected.

The outlook for next year was retained at 2.9 percent. Global growth is set to slow next year as front-loading ends and higher tariff rates and still-high policy uncertainty dampen investment and trade.

"The global economy has remained resilient, but the full effects of higher tariffs and policy uncertainty have yet to be felt," OECD Secretary-General Mathias Cormann said. "Global economic growth is projected to slow, and significant risks remain, as well as concerns about fiscal sustainability and financial stability."

The U.S. economic growth was projected to slow sharply to 1.8 percent this year from 2.8 percent last year. The pace of growth was expected to ease further to 1.5 percent in 2026. Growth is forecast to slow significantly as strong investment growth in high technology sectors is more than offset by higher tariff rates and a drop in net immigration.

Canada's growth is forecast to remain modest at 1.1 percent this year and 1.2 percent in 2026, thanks to greater trade restrictions on exports to the United States, the report said.

Euro area GDP growth forecast for this year was raised to 1.2 percent, but the projection for next year was trimmed to 1.0 percent. Increased trade frictions and geopolitical uncertainty are likely to somewhat offset by easier credit conditions. Among the big four, only Germany had its growth projections lowered. China's growth forecast for this year and next were raised to 4.9 percent and 4.4 percent, respectively. Growth momentum is expected to slow as front-loading unwinds, higher tariffs take effect and fiscal support fades.

India, which is one of the countries that are being severely targeted by Donald Trump's trade policies, had its growth forecast for this year raised to 6.7 percent from 6.3 percent. The projection for next year was cut to 6.2 percent from 6.4 percent. Overall economic activity is anticipated to be supported by monetary and fiscal policy easing, including the reform to the Goods and Services Tax, the OECD said.

Front-loading ahead of higher tariffs, strong AI-related investments in the U.S. and fiscal support in China were among the factors that boosted economic performance in the first half of the year and helped to offset the drag from trade headwinds and property market slowdown, the OECD observed. The Trump administration has been raising tariffs on imports from almost all countries and later revising them. China, India and Brazil are among the countries that face highest tariffs. The overall effective US tariff rate climbed to an estimated 19.5 percent at the end of August, the highest rate since 1933, the OECD said.

Early effects of higher tariffs are becoming increasingly visible in spending choices, labor markets and consumer prices, the think tank said. Labor markets are cooling in many countries, leading to higher jobless rates and less vacancies. Inflationary pressures are resuming a rising trend as goods inflation is fueled by higher food prices and services inflation still remaining persistent.

The OECD warned that asset values appear stretched in several economies and there is growing concern about future fiscal risks.

The report also drew attention to financial stability risks posed by high price volatility of crypto-assets and their growing interconnectedness with the traditional financial system.

G20 economies are set to witness a slowdown in inflation as economic growth and labor markets cool, the report said. Headline inflation in the G20 advanced economies is projected to be 2.5 percent this year and next, while core inflation is also anticipated to remain broadly stable at 2.6 percent this year and 2.5 percent in 2026.

Inflation is expected to remain above-target in the U.S. due to the increase in effective tariffs. Businesses reluctance to absorb the rising cost of imported goods will lead to stronger rate of pass-through to final goods prices.

The think tank urged countries to engage co-operatively to reduce the significant uncertainty in global trading system.

The OECD said central banks should remain vigilant and react promptly to shifts in the balance of risks to price stability. The organization also stressed on the importance of preserving central bank independence to ensure policy credibility and financial stability.

The report said that further policy easing is possible in the U.S. over the coming year as labor market pressures ease and provided that the higher tariffs do not lead to broader inflation pressures. The Federal Reserve cut the fed funds rate by 25 basis points to 4.0 percent last week, which was the first reduction this year.