The last few weeks have seen a whirlwind of announcements, executive orders, and threats by the new US administration, according to the latest Oxford Economics’ Global Industry Research Briefing.
For global industry, nowhere has this been felt more severely than in the realm of trade policy: the President has moved swiftly to advance an agenda that in some ways goes beyond what was promised in the campaign and goes quite a bit further than what we had assumed in our Q4 2024 industry update, it said.
At the time, our baseline took his policy promises seriously but not literally, incorporating tariffs that reflected his goals of protecting and encouraging domestic production in certain key strategic and politically favoured sectors.
Oxford Economics’ latest forecast update has refreshed our baseline to be both consistent with the trade actions taken to-date and actions we expect will be taken in the coming months.
US partially shielded, Canada and Mexican industry hit hard
We see tariffs hurting industrial output through three main channels: higher import prices lowering demand for the targeted country’s exports, supply-chain disruptions for the country imposing tariffs as input costs for imported components rise, and uncertainty depressing investment in an unpredictable environment.
We also see an indirect effect through higher interest rates: we expect that central banks will hold off cutting interest rates in the immediate future out of fear of the inflationary impacts of tariffs.
The US itself, with a large domestic market and relatively little foreign trade, is less vulnerable to trade shocks than many of the economies it is targeting. Furthermore, its supply chain reliance on its partners is, except for automotive and refining imports from Mexico and Canada, quite limited.
We therefore expect the administration to exempt automotives from tariffs and impose energy tariffs at a reduced rate, consistent with previous announcements in February and March.
We see the majority of adverse US impacts coming through uncertainty, with firms holding off on investment, and via a slower interest rate loosening cycle than we had previously anticipated.
We have almost halved our US industrial growth forecast for 2025 to 1.1%, down from 2.1% in Q4 2024.
Canada and Mexico, in sharp contrast, have a much greater dependence on both exports to the US and imports from the US than the other way around.
Their economies are therefore likely to be hit much harder by the tariffs. Both countries see industrial recessions: Canada’s manufacturing output gets hit very hard, shrinking by 1.9% in 2025 and 3.4% in 2026, while Mexican manufacturing suffers a shallower but still meaningful decline of 0.8% in 2025.
In both cases, a recovery takes hold by mid-to-end 2026 as our baseline assumes the tariffs are largely, but not entirely, removed under a renegotiated USMCA trade agreement.
Our analysis of the sectoral impact of these tariffs relies on our research into the export dependence of various goods-producing sectors in both countries. While there are some variations across both nations, there are some key similarities as well: machinery, electronics, and furniture are among the sectors that have seen the biggest downgrades since Q4 2024, and indeed see absolute declines or stagnation in output over the next year.
Europe is set for a slow, weak industrial recovery.
Our research has found that European industry has a notably lower reliance on US demand than Canada and Mexico.
But this provides little comfort given the two-year industrial recession that the region has experienced. The automotive industry, for example, exports just under 7% of its total gross output to the US.
While this is not large in the absolute sense, new tariff measures pose yet another threat to the sector’s recovery. It is still our view that European industry will start its recovery process later this year, largely driven by a recovery of domestic demand for industrial goods, normalising inventories, and a partial recovery for energy-intensive industries amid lower energy prices.
However, we have both delayed and pushed down the magnitude of that recovery: we now expect industrial growth of 0.6% in 2025 and 2.1% in 2026, down from 2.2% and 3.4% in our Q4 2024 forecast vintage.
While the expected US tariffs play a role in this downgrade, just as important is our re-evaluation of the Chinese threat to European industry. While our research in this area is ongoing, we now see greater challenges facing European industrial competitiveness.
Not only are Chinese exports increasingly competitive in areas where Europe is traditionally strong, such as machinery and automotive, but Chinese demand for imports, including intermediate imports from Europe, has been coming down in recent years as the government pushes for more self-sufficiency.
On the positive side of the ledger, announcements of significant increases in defence spending by European governments, most prominently Germany and France, will boost certain segments of the industry such as metal products and aerospace. While these are relatively smaller segments of total manufacturing, the military buildup is likely to provide growth tailwinds over the coming years.
Stimulus not enough to overcome external pressures on Chinese industry
China is the other major target of US tariffs (20% blanket tariffs cumulatively since President Trump has taken office) and is likely to see a notable industrial slowdown over the coming years. While industrial growth at the end of last year surpassed expectations, we expect the drivers to peter out over the coming quarters.
Exports, which surged to record highs in 2024, will be challenged not only by the imposition of US tariffs but increasingly by other nations unwilling to accept ever-growing Chinese trade surpluses. Indeed, even Russia, one of China’s closest allies, has moved to impose curbs on Chinese car imports in recent days.
While domestic fiscal policy announcements should help bolster economic and industrial growth, we had largely already incorporated these in our baseline forecasts.
As such, with exports growing only mildly over the next few years, we expect Chinese industrial value-added output to slow from 5.8% in 2024 to 4.0% this year, and 2.7% in 2026.
The full brief is here: https://www.oxfordeconomics.com/wp-content/uploads/2025/03/First-weeks-of-Trump-presidency-drag-down-industrial-prospects-1.pdf