The current trade war sparked by U.S. President Donald Trump’s tariff policies is expected by many experts to have wide-ranging impacts across the world, including on economic growth and labour markets, and a new report has been released that further highlights this warning.
The Organization for Economic Co-operation and Development’s latest outlook report outlines its dim forecast for global economies as well as key areas to help revive growth.
The group of 38 countries changed its outlook to reflect a worse-than-expected path for global economies compared with a previously released report.
“In this challenging and uncertain environment, we have downgraded our growth projections,” the report says. “Weakened economic prospects will be felt around the world, with almost no exception. Lower growth and less trade will hit incomes and slow job growth.”
The OECD now says economic growth is expected to decline from 3.3 per cent in 2024 to 2.9 per cent this year and in 2026.
In its last report from March, growth for this year and next year was projected to be 3.1 per cent.
Among the nations highlighted, the United States, Canada, Mexico and China are expected to be the biggest contributors to the global economic decline.
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The OECD sent out a separate report on May 26 featuring the economic survey for Canada, which said that although there would be an economic decline this year, there may not be a recession.
The report says “protectionism” will put pressure on inflation — meaning costs for goods and services will rise.
This suggests Trump’s goal of producing more goods and services for Americans within the United States by imposing tariffs on imports from other nations will likely have negative impacts on its own as well as global economies.
Warnings for global economies have been echoing for several months as the trade war has developed, with TD Bank saying Canada will be in a recession this year unless government policy is able to mitigate the damage from Trump’s tariffs.
When inflation gets too high, central banks will usually counteract those price pressures by increasing interest rates, which can mean higher monthly costs for many.
The Bank of Canada did so starting in 2022 when inflation, measured by the consumer price index, hit a multi-year high as a ripple effect of the COVID-19 pandemic.
The OECD suggests that in response to inflation pressures, central banks like the Bank of Canada “should remain vigilant.”
On Wednesday, the Bank of Canada will set monetary policy, and although no interest rate hikes are expected this time, if inflation does spike in the near future, then there is the potential to return to a period of higher borrowing costs again.
There is also the added risk that these tariffs pose for developing nations if governments are deep in debt.
“High debt levels and tighter financial conditions pose particular risks for developing countries, many of which have large debt refinancing needs in the near future,” the OECD says, adding that “countries should ensure that public debt is, indeed, on a sustainable path.”
The final suggestion outlined in the OECD report is to increase investments that will lead to stronger business development, and if governments are in debt, that may make it more difficult to finance future projects.
“Boosting investment will be instrumental to revive our economies and improve public finances.”
Prime Minister Mark Carney campaigned during the April election on plans to bolster the Canadian economy in the face of the trade war and increase spending to help diversify trading partners outside of the United States.
One of the other ways Carney has been working to mitigate the damage from the trade war is to make it easier for the provinces and territories to do business with each other, starting by removing federally regulated interprovincial trade barriers.
The prime minister met with the provincial premiers on Monday to discuss these changes, including for the energy sector, although the meeting showed that premiers believe more work needs to be done.
“Sluggish investment has lowered growth, productivity, and living standards,” the OECD report says, adding that “governments should work together to tackle uncertainty and pursue reforms to foster growth and jobs.”
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