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The outlook for economic growth in the U.S. was slashed due to higher tariffs in a new report released by the Organisation for Economic Co-operation and Development (OECD) on Tuesday.
The OECD’s forecast cut U.S. economic growth to 1.6% in 2025 and 1.5% in 2026, well below the 2.8% growth in gross domestic product (GDP) that was recorded last year.
The group attributed the slower growth forecast to the “substantial increase in the effective tariff rate on imports and retaliation from some trading partners, high economic policy uncertainty, a significant slowdown in net immigration, and a sizeable reduction in the federal workforce.”
It also projected that annual headline inflation will rise to 3.9% by the end of 2025 because of higher import prices stemming from tariff increases, before easing next year amid moderate GDP growth and higher levels of unemployment.
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Higher tariffs are expected to cause slower economic growth in the U.S. as well as higher prices, the OECD reported. (ROBYN BECK/AFP via Getty Images / Getty Images)
“Risks to the growth projection are skewed to the downside, including a more substantial slowing of economic activity in the face of policy uncertainty, greater-than-expected upward pressure on prices from tariff increases, and large financial market corrections,” the OECD wrote.
“There has been a significant shift in U.S. trade policy since February through a wide range of announcements regarding new tariffs and other trade restrictions, some of which have been reversed, delayed or modified, together with retaliation by some trading partners,” the report said.
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President Donald Trump has raised tariffs in an effort to reshore industries to the U.S. (Chip Somodevilla/Getty Images / Getty Images)
In the forecast, President Donald Trump’s tariffs that were in effect in mid-May would remain in place through the rest of 2025 and into 2026. The OECD noted the effective tariff rate on Chinese imports is up about 30%, while the tariff rate on other trading partners is up about 10%, on average.
“This represents an unprecedented increase in the average effective tariff rate, raising it from about 2.5% to above 15%, the highest since World War II,” the OECD wrote. “While the new tariffs may increase incentives to produce in the United States, higher import prices will reduce real incomes for consumers and raise the price of imported intermediate goods. Tariffs and policy uncertainty disrupt value chains and negatively affect investment.”
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Tariffs are taxes on imported goods that are paid by the importer, who typically passes the higher costs on to consumers through higher prices. (Photographer: Mark Felix/Bloomberg via Getty Images / Getty Images)
The forecast said that the Federal Reserve will be able to ease monetary policy and lower interest rates once inflation abates, as long as inflation expectations are well-anchored. It also noted that the federal government will need to rein in budget deficits, which are expected to grow larger in the years ahead, writing that a “significant fiscal adjustment will be required over several years.”
Deficits are expected to rise from about 7.5% of U.S. GDP in 2024 to over 8% in 2026, with the public debt-to-GDP ratio topping 100% by the end of 2026.
“New tariff revenues and spending cuts resulting from the shrinking of the federal workforce will be deficit-reducing,” though the OECD noted that “these effects will be more than offset by a slowing in revenue growth from weaker economic activity, as well as the expected enactment of a fiscal package for fiscal year 2026.”
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That package would extend the expiring provisions of the 2017 Tax Cuts and Jobs Act, as well as cutting other personal and corporate taxes, boosting spending on defense and border security, while making spending cuts to Medicaid. The OECD said that the package “is responsible for most of the projected 0.6 percentage point of GDP rise in the deficit in 2026.”