Full impact of US tariff shock yet to come as growth holds up, OECD says
Trucks wait in a long queue for border customs control to cross into the U.S. at the Otay border crossing in Tijuana, Mexico, on Feb 2, 2017. (Photo: REUTERS/Jorge Duenes)
PARIS: Global growth is holding up better than expected, but the full brunt of the US import tariff shock is still to be felt as AI investment props up US activity for now and fiscal support cushions China's slowdown, the OECD said on Tuesday (Sep 23).
In its latest Economic Outlook Interim Report, the Organisation for Economic Cooperation and Development said the full impact of US tariff hikes was still unfolding, with firms so far absorbing much of the shock through narrower margins and inventory buffers.
Many firms stockpiled goods ahead of the Trump administration's tariff hikes, which lifted the effective US rate on merchandise imports to an estimated 19.5 per cent by end-August - the highest since 1933, in the depths of the Great Depression.
"The full effects of these tariffs will become clearer as firms run down the inventories that were built up in response to tariff announcements and as the higher tariff rates continue to be implemented," OECD head Mathias Cormann told a news conference.
OECD'S 2025 GROWTH FORECASTS UPGRADED
Global economic growth is now expected to slow only slightly - to 3.2 per cent in 2025 from 3.3 per cent last year - compared to the 2.9 per cent the OECD had forecast in June.
However, the Paris-based organisation kept its 2026 forecast at 2.9 per cent, with the boost from inventory building already fading and higher tariffs expected to weigh on investment and trade growth.
"Additional increases in barriers to trade or prolonged policy uncertainty could lower growth by raising production costs and weighing on investment and consumption," Cormann said.
The OECD forecast US economic growth would slow to 1.8 per cent in 2025 - up from the 1.6 per cent it forecast in June - from 2.8 per cent last year before easing to 1.5 per cent in 2026, unchanged from the previous forecast.
An AI investment boom, fiscal support and interest rate cuts by the Federal Reserve are expected to help offset the impact of the higher tariffs, a drop in net immigration and federal job cuts, the OECD said.
In China, growth was also seen slowing in the second half of the year as the rush to ship exports before the US tariffs recedes and fiscal support wanes.
Nonetheless, China's economy is expected to grow 4.9 per cent this year - up from 4.7 per cent in June - before slowing to 4.4 per cent in 2026 - revised up from 4.3 per cent.
In the euro zone, trade and geopolitical tensions were seen offsetting the boost from lower interest rates, the OECD said.
The bloc's economy was seen growing 1.2 per cent this year - revised up from 1.0 per cent previously - and 1.0 per cent in 2026 - down from 1.2 per cent - as increased public spending in Germany lifts growth while belt-tightening weighs on France and Italy.
Japan's economy is expected to benefit this year from strong corporate earnings and a rebound in investment, lifting growth to 1.1 per cent - up from 0.7 per cent - before momentum fades and the expansion slows to 0.5 per cent in 2026, revised up from 0.4 per cent.
The OECD revised its growth forecast for Britain up to 1.4 per cent this year from 1.3 per cent, and kept its 2026 forecast unchanged at 1.0 per cent.
MONETARY POLICY EXPECTED TO BE LOOSE
With growth slowing, the OECD said it expects most major central banks to lower borrowing costs or keep policy loose over the coming year, as long as inflation pressures continue to ease.
It projected the US Federal Reserve would cut rates further as the labour market weakens - unless higher tariffs trigger broader inflation.
Australia, Britain and Canada are expected to see gradual rate cuts, while the European Central Bank is seen holding steady with inflation near its 2 per cent target.
Japan, however, is expected to raise rates as it continues its slow withdrawal from ultra-loose monetary policy.
