Mexico’s Economic Outlook Amid Tariff Uncertainty

By Ana Isabel Martinez and Noe Torres

MEXICO CITY (Reuters) – Mexico’s economy seems poised to contract in the first quarter, potentially entering a technical recession. Analysts point to U.S. President Donald Trump’s fluctuating tariffs as a significant factor disrupting already weakening growth.

Marco Oviedo, senior strategist for Latin America at XP Investments, remarked, “The damage is already done. Maybe there’s a slight recovery in the second quarter, but this quarter is lost.”

In late 2024, Mexico experienced its first quarterly GDP decline post-pandemic. A contraction in the first quarter would confirm a technical recession, characterized by two consecutive quarters of negative growth.

The U.S. tariffs add strain on Mexico’s economy, itself still recovering from a severe drought the previous year. Additional concerns arise from a disputed judicial overhaul and the ruling Morena party’s unchecked congressional power, leaving investors uneasy.

President Claudia Sheinbaum, despite high approval ratings, has faced difficulties in managing the country’s largest budget deficit since the 1980s. A declared technical recession may prompt calls for fiscal reform, though she has asserted that drastic reforms are unnecessary amid economic challenges.

Recently, Trump implemented 25% tariffs on imports from Mexico and Canada, with a temporary reprieve on goods adhering to the USMCA trade agreement.
Sheinbaum believes that exports compliant with the USMCA will remain tariff-free, aiming to increase compliant exports from 50% to between 85% and 90%, according to Economy Minister Marcelo Ebrard.

However, the tariff outlook remains uncertain, exacerbating frustration for negotiation teams in Mexico and Canada, while leaving businesses uncertain. Economists have raised alarms of heightened recession risks for the U.S., Mexico, and Canada, given the unpredictable future of the USMCA.

Mexico’s GDP recorded a seasonally adjusted contraction of 0.6% in the fourth quarter, with full-year growth at 1.2%, hinting at a deteriorating economic situation prior to Trump engaging with Mexico.

While Sheinbaum has maintained that Mexico’s economy is robust, she initiated a plan to stimulate investments and enhance local manufacturing, replacing imports. Nonetheless, some experts caution against jumping to conclusions too soon.

Jonathan Heath, deputy governor of Mexico’s central bank, emphasized, “It is very premature to speak of a recession” despite potential slight first-quarter contractions; he acknowledged ongoing stagnation due to uncertainty.

In February, Mexico’s central bank lowered its GDP growth forecast for 2025 to 0.6% from 1.2%, while the Finance Ministry still predicted growth of 2% to 3%.
Gross fixed investment dipped by a seasonally adjusted 2.6% in December, with private consumption down by 1.1%.

Fitch Ratings warned that a broad 25% tariff could lead Mexico toward recession this year, jeopardizing its “BBB-” rating if economic conditions deteriorate public finances. Sheinbaum might contemplate fiscal reforms to bolster revenue and public expenditure, yet such moves would likely exacerbate the deficit she has been working to mitigate.

Echoing the evolving economic landscape, Ernesto Revilla, Citi’s chief economist for Latin America, stated, “We have to recognize the rules have changed. There is a new level of uncertainty in the North American region that will scare off investment regardless of whether tariffs are implemented.”