US President Donald Trump’s escalating trade tariffs will hit world growth and raise inflation, the OECD has predicted in its latest forecast.

Canada and Mexico are forecast to see the biggest impact as they have had the harshest tariffs imposed on them, but US growth is also expected to be hit.

The OECD has more than halved its growth outlook for Canada for this year and next, while it expects Mexico to be pushed into a recession.

Trump has imposed 25% tariffs on all steel and aluminium imports. The US has also imposed 25% tariffs on other imports from Mexico and Canada – with some exemptions – and a 20% levy on Chinese goods.

In response, Canada and the EU have both announced retaliatory tariffs.

The Paris-based OECD said the higher trade barriers and “increased geopolitical and policy uncertainty” was hitting investment and household spending.

In the OECD’s latest forecast:

• Canada’s economy is predicted to grow by just 0.7% this year and in 2026, compared with the previous forecast of 2% for both years
• Mexico is now forecast to contract by 1.3% this year and shrink a further 0.6% next year, instead of growing by 1.2% and 1.6% as previously expected
• Growth in the US has also been downgraded, with growth of 2.2% expected this year and 1.6% in 2025, down from previous forecasts of 2.4% and 2.1%
• Despite the US imposing tariffs on China, the OECD has increased its growth forecast for the country slightly to 4.8%.

The OECD said the developing trade war was set to push up inflation, which will mean interest rates are likely to remain higher for longer.

“Significant risks remain,” it warned. “Further fragmentation of the global economy is a key concern.

“Higher and broader increases in trade barriers would hit growth around the world and add to inflation”.

The OECD said that for the world economy, growth would slow from 3.2% in 2024 to 3.1% in 2025, largely as a result of the trade tensions.

Last week, Elon Musk’s electric car firm Tesla warned that it, and other US exporters, could be harmed by the trade battle.

In a letter to the US trade representative, the firm said US exporters were “exposed to disproportionate impacts” if other countries retaliated to Trump’s tariffs.

The OECD cut its growth forecast for the UK’s economy to 1.4% in 2025, from its previous forecast of 1.7%, and to 1.2% in 2026, down from 1.3%.

However, the forecast is more optimistic than the Bank of England, which earlier this month cut its UK growth forecast for 2025 to 0.75%.