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UK economy downgraded by OECD over Trump tariff war

The figures will be a blow to the chancellor who is at risk of missing fiscal targets without plans for spending cuts

The OECD said the prospect of deepening fragmentation across the world economy would reduce growth and cause living standards to deteriorate JOHNNY GREIG/GETTY IMAGES

The OECD said the prospect of deepening fragmentation across the world economy would reduce growth and cause living standards to deteriorate JOHNNY GREIG/GETTY IMAGES

Growth projections for the UK economy have been downgraded this year and next by the Organisation for Economic Cooperation and Development, which has warned countries to step back from escalating global tariffs wars.

The OECD, which represents 38 advanced economies, said the UK’s annual economic growth would be 0.3 percentage points lower than forecast this year at 1.4 per cent of GDP and 0.1 percentage points lower next year at 1.2 per cent. Its inflation forecasts were unchanged, with consumer prices averaging 2.7 per cent this year and 2.3 per cent in 2026.

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While the changes mean Britain is on track to be the second fastest-growing economy in the G7, the figures will be a blow to the chancellor Rachel Reeves ahead of this month’s spring statement, where she is at risk of missing her fiscal targets without plans for sizeable spending cuts. The OECD said the growth outlook has weakened on the back of trade tensions and inflationary pressures that will keep interest rates stuck at 4 per cent until the next of next year. The base rate is currently at 4.5 per cent.

The OECD’s biggest downgrades were reserved for the US, Mexico, and Canada after the Trump administration said it would hit America’s closest trading partners with a blanket 25 per cent import levy from next month.

Canada’s growth prospects are on course to be 1.3 percentage points lower this year and next, to 0.7 per cent annual growth in 2025 and 2026. Mexico’s economy is likely to plunge into a recession, with a forecasted annual contraction of 1.3 per cent of GDP this year and a drop of 0.6 per cent in 2026 — downgrades of 2.5 per cent and 2.2 per cent respectively since the OECD’s December forecast.

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The downgrades to Canada’s lifted the UK in the G7 rankings to behind the US in 2025 and 2026. The OECD also revised down GDP outlook for Germany (0.4 per cent in 2025), France (0.8 per cent in 2025) and Italy (0.7 per cent in 2025). Spain was the only major economy to enjoy better prospects, with its projections up to 2.6 and 2.1 per cent in 2025 and 2026.

The US is also at risk of a slowdown triggered by its trade policies, with the OECD downgrading its 2026 forecast by 0.5 per cent to 1.6 per cent of GDP. This year, the US economy is expected to slow from a 2.8 per cent expansion in 2024 to 2.2 per cent of GDP — a reduction of 0.2 percentage points compared to the OECD’s last projections made in December, before Donald Trump’s inauguration on January 20.

Responding to the figures, Reeves said: “This report shows the world is changing, and increased global headwinds such as trade uncertainty are being felt across the board. A changing world means Britain must change too, and we are delivering a new era of stability, security and renewal, to protect working people and keep our country safe.”

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The projections are predicated on a universal 25 per cent tariff on Canada and Mexico from next month. It does not include the impact of a broader system of “reciprocal” levies promised by Trump that would also capture trade from the UK and the European Union from next month.

Should the US impose a wider 10 per cent tax on all goods, the global economy would be hit with a 0.3 percentage point growth shock and inflation risks being 0.4 percentage points stronger every year for the next three years. US economic growth would be 0.7 percentage points lower by 2028 and inflation would climb by another 0.7 percentage points.

The Paris-based institute said the prospect of deepening fragmentation across the world economy would reduce growth and cause living standards to deteriorate.

“Countries need to find ways of addressing their concerns together within the global trading system. Living standards would benefit from coupling these measures with efforts to strengthen the resilience of supply chains, as well as regulatory reforms that promote dynamic product and labour markets and policies to encourage skill upgrades,” the OECD said.

In a direct challenge to the Trump administration, the OECD said revenues generated from import taxes would be offset by falling tax revenues from a smaller economy and a worsening outlook for the public finances. Trump has said he will pay for sweeping tax cuts with potentially billions of dollars generated from new import levies.

“In some countries, including the United States, the combined fiscal impact of the rise in tariff revenue and broader changes in the economy is negative, implying that additional tax increases or lower fiscal expenditure are needed to keep the overall budget deficit unchanged,” the OECD said.

Author: Mehreen Khan, Economics Editor

Source: The Sunday Times

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