OECD slashes Canada's growth forecast as tariffs raise inflation risks

The Organization for Economic Co-operation and Development (OECD) has reduced its economic growth forecast for Canada, warning that global trade disruptions caused by Donald Trump’s tariff policies could impact inflation and interest rates.

According to Financial Post, the OECD now projects Canada’s gross domestic product (GDP) will grow by 0.7 percent in 2025 and 2026, a decline of 1.3 percentage points from its December 2024 estimate.

The OECD report highlights the potential consequences of a 25 percent tariff imposed by the United States, alongside retaliatory measures from Canada.

The analysis also considers US tariffs on steel and aluminum imports, as well as the trade dispute between the US and China.

Tariff Tracker (as of March 18)

  ^{Source: Financial Post}

The OECD expects policy uncertainty to affect businesses and households, leading to reduced capital investment and lower spending on durable goods.

Canada’s downgraded forecast is among the more significant adjustments in the OECD’s outlook for its 38 member countries.

Mexico, another target of US tariffs, is the only nation predicted to experience economic contraction, with a projected decline of 1.3 percent

Meanwhile, the OECD forecasts US economic growth of 2.2 percent in 2025, down 0.2 percentage points from its previous estimate, and 1.6 percent in 2026, a decrease of 0.5 percentage points.

If the US extends tariff exemptions beyond April 2 for goods compliant with the Canada-United-States-Mexico Agreement (CUSMA), Canada’s growth could improve to 1.3 percent in 2025 and 2026.

Under this scenario, Mexico would also avoid a recession, provided both countries reduce retaliatory tariffs.

The OECD projects that Canada’s inflation rate will rise by 1.1 percentage points in 2025, reaching 3.1 percent, before moderating slightly to 2.9 percent in 2026.

In January 2025, inflation stood at 1.9 percent. Core inflation is expected to reach 3.1 percent in 2025, exceeding the Bank of Canada’s target range.

The report warns that tariffs could drive inflation expectations higher, a key concern for central banks.

Rising inflation expectations can influence business and household spending decisions, as well as wage demands, as workers seek higher pay to keep pace with increasing living costs.

While inflation expectations were aligning with central bank targets at the end of 2024, signs of an upward trend are emerging, particularly in the United States.

The OECD cautions that rising inflation expectations and slowing growth could lead to financial market volatility and increased risk in global markets.

According to the OECD, higher tariffs and trade barriers would contribute to global inflationary pressures, leading to rising interest rates.

Last week, the Bank of Canada cut its key interest rate by 25 basis points to 2.75 percent but indicated that future rate decisions would depend on inflation trends.

In a worst-case tariff scenario, the OECD forecasts interest rates in Canada could increase by 1 to 1.25 percentage points, significantly higher than the 0.25 to 0.5 percentage point rise projected for other major economies.

The report suggests that interest rates may need to remain elevated longer than previously anticipated as higher costs from tariffs filter through the economy.

However, the OECD notes that policymakers could continue to cut interest rates if tariff impacts remain limited and slowing economic growth counterbalances inflationary pressures.