Trump's Tariffs Could Fuel Inflation In Canada, Mexico Warns Economic Expert

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The latest forecast from the Organisation for Economic Co-operation and Development announced a particularly stark warning for North American economies.

The institution's latest report warns that escalating tariffs combined with persistent inflation and policy uncertainty could drag Mexico into a recession while sharply slowing Canada's economy.

Although the U.S. economy continues to grow, signs of strain are emerging and economists are increasingly concerned that trade barriers imposed under Trump’s policies could exacerbate economic challenges by fueling inflation and prolonging tight monetary policy.

North America's Growth Outlook Deteriorates

The Paris-based OECD downgraded its projections for all three of North America’s major economies in its March 2025 Economic Outlook Interim Report.

Economic growth in the U.S. is now expected to reach 2.2% in 2025, a decline of 0.2 percentage points from the institution's December forecast. The pace of expansion is forecast to slow further to 1.6% in 2026 as the economy absorbs the impact of tight monetary policy and rising trade restrictions.

Canada's outlook has weakened even more, with growth now projected at just 0.7% for 2025. The revision marks a steep 1.3 percentage-point downgrade from previous estimates, underscoring the mounting challenges for an economy heavily reliant on trade with its southern neighbor.

Mexico's economic prospects have taken the hardest hit, with the OECD now predicting a 1.3% contraction in 2025, a drastic downward revision of 2.5 percentage points that signals a looming recession. Growth in Mexico is expected to remain negative in 2026, with output declining by an additional 0.6%.

Tariffs, Trade Wars Cloud Region Outlook

“These projections are based on an assumption that bilateral tariffs between Canada and the United States and between Mexico and the United States are raised by an additional 25 percentage points on almost all merchandise imports from April,” the OECD said.

Mexico has not yet introduced specific trade policy changes but has indicated a general intention to retaliate should Washington proceed with its tariff increases.

Given their deep trade ties with the U.S., both Canada and Mexico are particularly vulnerable to the economic fallout, with the OECD warning that "such tariffs are likely to be particularly costly for Canada and Mexico due to their greater openness to trade, and high proportion of trade with the United States."

“Greater policy uncertainty can be expected to hold back spending decisions by companies and households, particularly on longer-term items such as fixed capital investment and durable goods.”

Trade Tariffs Fuel Inflation Risks

The report also highlights growing concerns over inflation, as higher trade costs ripple through supply chains and push up consumer prices.

"Increased trade costs are expected to feed through gradually to final goods prices, putting additional upward pressure on inflation in many countries and requiring monetary policy to remain restrictive for longer than previously expected," the OECD stated.

In the U.S., inflation is now projected to rise to 2.8% in 2025, an upward revision of 0.7 percentage points from December estimates. Canada's inflation rate has also been revised higher to 3.1%, while Mexico's is now expected to reach 4.4%.

“If the announced trade policy actions persist, as assumed in the projections, the impact of higher costs will be amplified where inputs cross borders several times and duties are incurred at each stage, as is the case in the integrated North American market," the OECD said.

Uncertainty Weighs On Consumption And Investments

Uncertainty over trade policy is also discouraging business investment across the continent. Companies are hesitant to commit to capital expenditures in an environment where tariffs and trade rules are shifting unpredictably.

Recent economic data already suggest that sentiment is deteriorating.

"Consumer confidence generally dipped further in early 2025 and remains below long-run average levels despite strong growth in real incomes in many economies," the report noted. In the U.S., "personal real consumer spending declined in January."

The OECD also warned of potential volatility ahead, as any surprises — whether a resurgence in inflation or weaker-than-expected economic growth — could quickly ripple through global markets.

"A resurgence of inflation or downside surprises to economic growth could trigger a rapid repricing in financial markets and a further rise in market volatility," the report said.

Moreover, “higher-than-expected inflation would prompt more restrictive monetary policy.”

The iShares MSCI Mexico ETF EWW traded 0.6% higher on Monday, eyeing its fifth straight session of gains. Canadian stocks gained substantially; the iShares MSCI Canada Index Fund EWC rose by 1.1%, yet the fund has fallen by 5% from a month ago.

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