OECD warns Trump's tariffs could slow Canada's economy and push inflation higher

The Organization for Economic Co-operation and Development (OECD) has warned that Donald Trump’s tariff war could reverse Canada’s economic gains from 2024, Financial Post reported.

The organization reduced its forecast for Canada’s growth by more than half, pointing to the potential impact of 25 percent US tariffs and the likelihood of Canadian retaliation.

The report also factors in trade restrictions between the US and China, as well as the broad 25 percent US tariffs on steel and aluminum imports, which apply to Canada.

Tariff Tracker (as of March 18)

_{Source: Financial Post}

The OECD now expects Canada’s GDP to grow by 0.7 percent in 2025 and 2026, cutting its previous estimate by 1.3 percentage points.

The report indicates that businesses and households will likely reduce spending on capital investments and durable goods due to policy uncertainty caused by tariffs.

Among OECD countries, Canada’s downgraded outlook is among the lowest. Mexico, which also faces tariffs, is the only economy expected to contract, with a forecasted decline of 1.3 percent in 2025.

The US economy is projected to expand by 2.2 percent in 2025, which is 0.2 percentage points lower than previously expected. The forecast for 2026 has been reduced by 0.5 percentage points to 1.6 percent.

The outlook could improve if the US extends tariff exemptions beyond April 2 for goods that meet CUSMA requirements.

Under this scenario, Canada’s growth rate could rise to 1.3 percent in 2025 and 2026. Mexico could also avoid a recession if both countries ease retaliatory tariffs.

Tariffs could push Canada’s inflation rate up by 1.1 percentage points to 3.1 percent in 2025, before it slightly declines to 2.9 percent in 2026. January’s inflation rate stood at 1.9 percent.

Core inflation is expected to reach 3.1 percent in 2025, surpassing the upper limit of the Bank of Canada’s target range. The OECD report warns that tariffs could raise inflation expectations, which central bankers monitor closely.

Higher inflation expectations could influence consumer spending and wage demands as businesses and workers anticipate rising costs.

By the end of 2024, inflation expectations had aligned with central banks’ goals, but recent trends indicate they are climbing again, particularly in the US.

The OECD also cautioned that increased inflation expectations combined with slower growth could “trigger a rapid repricing in financial markets and a further rise in market volatility.”

Tariffs and trade restrictions would likely drive-up inflation globally, leading to higher interest rates, the OECD reported.

The Bank of Canada lowered its benchmark rate to 2.75 percent last week but indicated that inflation trends would determine future rate adjustments.

If the worst-case tariff scenario unfolds, the OECD predicts that Canada’s interest rates could increase by 1 to 1.25 percentage points—higher than the 0.25 to 0.5 percentage point increase expected in other major economies.

The report also suggests that rates may need to stay high longer than initially projected as tariffs continue to affect consumer costs.

The OECD states that interest rate cuts remain possible, but only if tariffs are limited enough for slowing economic growth to counterbalance price increases.