Slower Growth Ahead: Insights from the Latest OECD Economic Projections

April 2, 2025

Trade tensions between Canada, the U.S., and Mexico are creating significant economic uncertainty across North America. While the unpredictability of this American-induced trade conflict makes economic forecasting difficult, a new report from the Organisation for Economic Co-operation and Development (OECD) provides projections for the Canadian economy over the next two years. These projections could prove essential for CPAs advising businesses and helping clients make informed decisions in a volatile economic environment.

The report, appropriately titled “Steering through Uncertainty,” presents a sobering picture of softening global growth and higher than previously expected inflation. U.S. protectionist trade policies are primarily driving these changes, with Canada, the U.S., and Mexico projected to experience varying degrees of negative economic shocks in 2025 and 2026.

Growth and inflation projections for Canada

Canada’s real (inflation-adjusted) GDP grew by 1.5% in 2024. That level of economic growth is paltry on its own, especially when adjusted for a surging population. In fact, over the past decade, Canada’s real GDP per capita performance has been lagging.

Modelling the future economic impacts of a trade war is challenging, especially in a constantly changing environment. To simplify, the OECD outlines three scenarios underpinning their projections:

1. Baseline scenario: Assumes no tariffs applied, projections are those outlined in the OECD’s December 2024 economic outlook.
2. Tariff scenario: Assumes a 25% U.S. tariff on merchandise imports from Canada and Mexico, with exceptions for Canadian energy (10% tariff) and potash imports from both Canada and Mexico (10% tariff). This scenario also assumes that equivalent retaliatory tariffs will be levied on merchandise imports from the U.S. by Canada and Mexico.
3. Light tariff scenario: Assumes the tariff exemption status for USMCA-compliant merchandise imported from Canada and Mexico into the U.S. that was announced on March 6th is maintained with proportionally reduced retaliatory tariffs from Canada and Mexico.

Looking ahead to 2025 and 2026, the OECD anticipates that a trade war would be a significant drag on growth for Canada. The tariff scenario projects real GDP growth in Canada to slow to 0.7% in both 2025 and 2026, representing a 1.3 percentage point reduction from the baseline scenario.

Since tariffs increase the price of goods, inflation is also projected to rise. In Canada, where the inflation rate was 2.4% in 2024, the tariff scenario has inflation rising to 3.1% in 2025, and 2.9% in 2026—1.1 and 0.8 percentage points higher, respectively, than the baseline scenario.

Canadian inflation in February 2025 already rose sharply to an eight-month high of 2.6%, 0.6% higher than the baseline scenario. This acceleration followed the end of the federal GST/HST holiday in mid-February, which had kept inflation lower during the two-month period it was in effect.

In the light tariff scenario, the impact of tariffs on economic growth would attenuate, and inflation would not increase as sharply. In this scenario, the OECD projects that real GDP growth in Canada would be 1.3% in both 2025 and 2026—0.7 percentage points below the baseline scenario. Light tariffs would also reduce inflation relative to the full tariff scenario, with the projections at 2.6% in 2025 (0.6% higher than baseline) and 2.5% in 2026 (0.4% higher than baseline).

Under the tariff scenario, all North American economies face lower projected growth, although to varying degrees. Mexico is projected to enter a recession, with growth slowing from 1.5% in 2024 to -1.3% in 2025 and -0.6% in 2026—a decrease of 2.5 and 2.2 percentage points, respectively, compared to the baseline projections in 2025 and 2026.

The U.S. would experience milder effects, with growth slowing from 2.8% in 2024 to 2.2% in 2025 and 1.6% in 2026, representing decreases of 0.2 and 0.5 percentage points, respectively, below the baseline scenario.

In the tariff scenario, global GDP growth is projected to soften from 3.2% in 2024, to 3.1% in 2025 and 3.0% in 2026 (both down from 3.3% in the baseline projection) because of higher trade barriers.

Lower consumer confidence, driven by uncertainty, slows growth

In response to the trade war, Canadians are expecting to delay major purchases and save for precautionary reasons, as shown in the Bank of Canada’s February survey of businesses and consumers.

Plummeting consumer confidence is driven partly by trade policy uncertainty, and the OECD report confirms what Canadians know: since 2024, the greatest rise in policy uncertainty has been in Canada and Mexico. This uncertainty is expected to continue to discourage companies and households from investing and spending.

Internal trade reform important to counter impact of tariffs

The OECD presents some policy prescriptions to counter the impact of tariffs. Two of these measures are greater “international cooperation” (defined in the report as governments finding ways to avoid retaliatory trade barriers between countries and avoid further trade fragmentation) and regulatory reform to allow for freer internal trade.

The OECD specifically singles out Canada as a country where reducing regulatory barriers to internal trade could improve growth. The barriers to interprovincial trade have long been an issue in Canada—but now, with the trade conflict with the U.S., steps are being taken on this front. Improving internal trade could help to offset some of the effects of trade restrictions.

Conclusion

While no one has a crystal ball, the OECD’s projections illustrate how a tariff scenario could impact Canada’s economy. The two key takeaways are reduced economic growth and increased inflationary pressures but the magnitude of each will depend on the depth and breadth of the tariffs applied by all countries involved.

Many organizations do not have an internal economist to keep them abreast of all the implications of decisions related to the trade war; this is why projections like those published by the OECD can be essential to staying on top of this ever-changing trade landscape, and especially valuable to CPAs.