Tariff chaos could push Mexico into technical recession, analysts warn

Mexico’s economy appears on track to contract in the first quarter, potentially plunging the country into a technical recession, as U.S. President Donald Trump’s fluctuating tariff policies disrupt growth that was already showing signs of weakness.

Analysts warn that the damage is already done. “The damage is already done, maybe there's a slight recovery in the second quarter, but this quarter is lost,” said Marco Oviedo, senior strategist for Latin America at XP Investments. The threat looms large following a steep quarterly GDP slump in the final months of 2024 – the first since the pandemic – which set the stage for two consecutive quarters of negative growth if Q1 results remain weak.

Trump’s tariff threats have compounded Mexico’s economic challenges, adding to the strain from a devastating drought last year, a controversial judicial overhaul, and concerns over the unchecked power of the ruling Morena party in Congress. These issues have left Mexico’s President Claudia Sheinbaum scrambling to rein in spending amid the nation’s highest budget deficit since the 1980s. A technical recession could renew pressure on her administration to implement fiscal reforms, though Sheinbaum insists that Mexico does not need sweeping changes even as she struggles to balance welfare programs with fiscal discipline.

Last week, Trump imposed 25% tariffs on all imports from Mexico and Canada, though he later offered a month-long reprieve on goods compliant with the USMCA. Economy Minister Marcelo Ebrard noted that about half of Mexican exports to the U.S. are currently USMCA-compliant, with plans to boost that figure to between 85% and 90% to avoid tariff impacts. Despite these measures, the outlook remains uncertain as frequent shifts in U.S. tariff policy have left businesses in a state of limbo.

Economists participating in Reuters surveys have highlighted the growing risk of recession not only for Mexico, but also for its North American trade partners, due to the uncertain future of the USMCA. Mexico’s GDP contracted at a seasonally adjusted 0.6% rate in the fourth quarter, while full-year growth was a modest 1.2%, signaling a deteriorating economic picture even before the current tariff threats emerged.

Deputy governor of Mexico’s central bank, Jonathan Heath, cautioned against premature declarations of a recession. “It is very premature to speak of a recession,” Heath told Reuters, though he acknowledged a period of stagnation driven largely by prevailing uncertainty. Heath expects declines in construction and parts of the manufacturing sector, but remains unsure if the slowdown will be widespread.

In February, Mexico’s central bank cut its forecast for 2025 GDP growth to 0.6% from an earlier 1.2%, while the Finance Ministry maintained a more optimistic outlook of 2% to 3% growth. Other economic indicators have also shown signs of strain, with gross fixed investment falling by 2.6% in December and private consumption dropping by 1.1%.

Fitch Ratings recently warned that a 25% tariff across the board could push Mexico into recession this year and jeopardize its “BBB-” credit rating if public finances deteriorate further. Analyst Ernesto Revilla, Citi’s chief economist for Latin America, summed up the sentiment: “We have to recognize the rules have changed. There is a new level of uncertainty in the North American region that, regardless of whether the tariffs don’t happen, will cause permanent damage because it's going to scare off investment.”

As Mexico grapples with these multiple economic headwinds, the potential for a technical recession underscores the deep challenges facing the nation amid volatile trade policies and domestic fiscal

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