Blow for Rachel Reeves with UK growth forecast slashed as Trump escalates global trade war

The UK’s forecast has been downgraded amid a dimmer global outlook, in another blow to Chancellor . Experts warn of slowing world growth and rising , driven by escalating trade tensions. The Organisation for Economic Co-operation and Development (OECD) revised its UK growth projections to 1.4% for 2025 and 1.2% for 2026, down from previous estimates of 1.7% and 1.3%, respectively.

Globally, the OECD expects growth to slow from 3.2% in 2024 to 3.1% in 2025 and 3% in 2026, a reduction from prior forecasts of 3.3% for both years. The slowdown is primarily attributed to trade tensions, largely stemming from US trade policies under President .

Canada and Mexico were hit hardest, with their growth forecasts slashed after Mr Trump’s move to impose harsh tariffs on imports from the countries. The US is also facing economic challenges, with the OECD cutting its growth forecast for the world’s largest economy to 2.2% in 2025 and 1.6% in 2026, down from 2.4% and 2.1%, respectively.

In its interim economic outlook, the OECD warned that “consumers face much of the burden of higher tariffs,” highlighting the potential for significant impacts on living standards.

The OECD said: “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. Higher-than-expected inflation would prompt more restrictive monetary policy and could give rise to disruptive repricing in financial markets.”

The report indicates that inflation in the G20 group of countries will rise to 3.8% this year and 3.2% next year, up from the 3.5% and 2.9% the OECD predicted in December. As a result, are likely to remain higher for longer.

In the UK, it held its predictions for inflation at 2.7% this year and 2.3% in 2026.

Chancellor Rachel Reeves said: “This report shows the world is changing, and increased global headwinds such as trade uncertainty are being felt across the board.”

She added: “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.”

She said this would mean Britain can “better respond to global uncertainty.”

Mr Trump’s new trade policies, which took effect earlier this month, have imposed 25% tariffs on imports from Canada and Mexico, with a 10% tariff on Canadian energy products. The tariff on Chinese imports has also doubled from 10% to 20%.

Although the UK has avoided the harshest penalties, it has been caught by last week’s sweeping 25% tariffs on steel and aluminium entering the US. These moves have prompted swift retaliation from affected countries, sending financial markets into turmoil amid fears of a potential recession in the US.

The OECD has significantly downgraded growth forecasts for Canada, now predicting just 0.7% growth this year and next, down from 2%. Mexico is expected to slide into recession, with output set to shrink by 1.3% in 2025 and 0.6% in 2026, starkly contrasting previous growth projections of 1.2% and 1.6%.

China’s growth is also set to slow, from 4.8% this year to 4.4% in 2026. The trade war is taking a toll in Europe, with the euro area’s growth forecast cut to 1% in 2025, down from 1.3%.

The OECD warned that unless governments find ways to address their concerns within the global trading system, the continued escalation of trade barriers could largely impact living standards worldwide.

The OECD said: “Governments need to find ways of addressing their concerns together within the global trading system to avoid a significant ratcheting up of retaliatory trade barriers between countries.

“As already highlighted, a broad-based further increase in trade restrictions would have significant negative impacts on living standards.”