Full Impact of U.S. Tariff Shock Yet to Come as Growth Holds Up

  • Global growth is holding up better than expected, but the full brunt of the U.S. import tariff shock is still to be felt as AI investment props up U.S. activity for now and fiscal support cushions China's slowdown, the OECD said on Tuesday.
  • In its latest Economic Outlook Interim Report, the Organisation for Economic Cooperation and Development (OECD) said the full impact of U.S. 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 U.S. rate on merchandise imports to an estimated 19.5% by end-August, the highest since 1933, in the depths of the Great Depression.
  • Global economic growth is now expected to slow only slightly to 3.2% in 2025 from 3.3% last year — compared to the 2.9% the OECD had forecast in June. However, the Paris-based organisation kept its 2026 forecast at 2.9%, with the boost from inventory building already fading and higher tariffs expected to weigh on investment and trade growth.
  • The OECD forecast U.S. economic growth would slow to 1.8% in 2025, up from the 1.6% it forecast in June, from 2.8% last year before easing to 1.5% 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 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% this year - revised up from 1.0% previously - and 1.0% in 2026 - down from 1.2% - as increased public spending in Germany lifts growth while belt-tightening weighs on France and Italy.
  • 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.

(Source: Reuters)