Mexico slides towards recession amid Trump turmoil

Mexico’s economy is slowing sharply and will soon fall into recession, several economists predict, as Donald Trump’s changing tariff plans cast uncertainty over the relationship with its largest trading partner.

Mexico is one of the countries most vulnerable to the US president’s drive to reshore investment and close trade deficits. The country’s economy was already fragile, with the government cutting spending due to a gaping budget deficit and investors spooked by its radical judicial reforms.

Mexico’s GDP shrank 0.6 per cent in the fourth quarter of last year from the previous three months, while economic activity fell 0.2 per cent in January.

The central bank cut its key interest rate by 50 basis points on Thursday, warning that the economy would show weakness in the first quarter and that trade tensions posed “significant downward risks”.

Deputy central bank governor Jonathan Heath said fourth-quarter data showed a broad-based downturn. “All the components of the internal economy are in negative territory,” he told the Financial Times. “It’s broad enough to say it’s a generalised fall.”

Five economists from global banks said it was very likely that Mexico’s GDP would shrink for the second straight quarter in the three months to March.

“It is also increasingly likely that growth for the full year will also be negative, and there is not much the authorities can do about it,” said Alberto Ramos, chief Latin America economist at Goldman Sachs.

The Mexican peso had weakened significantly against the dollar long before Trump’s victory in November, as President Claudia Sheinbaum’s party embarked on a sweeping overhaul of the economic and political system. Her government is introducing elections for judges, dissolving independent regulators and reforming the electoral institute.

The combination of Trump’s tariffs and controversial domestic reforms had inflicted a double blow on investor confidence, said Ernesto Revilla, chief Latin America economist at Citi.

“This near-certain recession for Mexico is not only due to tariff uncertainty, but also to the negative domestic confidence shock associated [with] the deep constitutional reform,” said Revilla, former chief economist at Mexico’s finance ministry.

Sheinbaum says the reforms will encourage investment by eliminating corruption in the courts and simplifying regulations.

“The economy is strong,” she insisted last week. “That’s something we should all be proud of because it’s not just an achievement of the Mexican government but an achievement of all Mexicans.”

Over the past three decades, Mexico has transformed from a largely closed economy into the US’s largest trading partner thanks to the free trade deal now called USMCA, with goods exports accounting for about 35 per cent of GDP.

The Latin American nation sends 80 per cent of its exports to the US, and is particularly reliant on the auto sector.

That model is under attack from Trump, who blames Mexico for drugs and migrants coming across the US southern border and for hollowing out US manufacturing.

He has imposed tariffs on auto imports and non-USMCA compliant goods. Uncertainty over his future levies, including whether products that comply with USMCA will be hit with tariffs, is halting investment across the region.

“We now think a recession is unavoidable,” analysts at JPMorgan wrote in a note. “With external demand only providing partial cover, and domestic demand having weakened substantially, we expect GDP to stagnate throughout the next handful of quarters.”

The current exemption from tariffs for USMCA-compliant goods expires on April 2, while Trump has also promised a “liberation day” of imposing widespread tariffs globally on the same date. The Mexican government hopes the US will maintain a broader tariff exemption or preferential deal for goods that comply with USMCA.

Earlier this month, the OECD slashed its Mexico forecast, projecting the country’s economy will shrink 1.3 per cent this year, the only economy in the group seen as falling into a recession. The projection is based on 25 per cent US tariffs being imposed across the board in April.

Even if tariff exemptions remain, the Mexican economy would grow just 0.1 per cent, it said.

Sheinbaum inherited the country’s largest budget deficit since the 1980s, and has vowed to slash spending by 2 per cent of GDP, the largest cut in modern history.

Her government has set an ambitious target of receiving combined private and public sector investment of more than 25 per cent of GDP every year. Economists said that would be a challenge, given the uncertainty over the US relationship and domestic regulatory overhauls.

But the spectre of Trump and his tariffs has helped Sheinbaum avoid criticism for her role in damaging investor confidence, with her deft diplomacy pulling her approval rating above 80 per cent.

While all economists are cutting their forecasts, some have argued that despite weak manufacturing data, the country’s consumer and employment trends are still relatively solid. If Mexico escapes tariffs, they argue, it could recover some investment.

If first-quarter GDP data published in April is negative, the country would be in a recession under the technical definition. But in Mexico, like the US, a broader determination is made by an independent body of economists.

The country faces a difficult year regardless of whether it is officially declared to be in recession or narrowly avoids it, said Alejandro Werner, a former IMF official and director at the Georgetown Americas Institute.

“For the worker who loses his job it’s the same,” he said. “The most important thing is that Mexico is going to have a very sharp slowdown.”