Mexico’s economic outlook: is a recession inevitable?
Since the official announcement of tariffs on Mexico by the Trump administration at the beginning of this year, fears that the second largest economy in Latin America is headed towards a recession have multiplied. The country’s dependency on the US as a trading partner inevitably make it susceptible to the adverse economic effects of tariffs from its neighbour. However, data from the first quarter of 2025, as well as policies implemented by the government and central bank, could counteract these effects, at least to some degree, but whether they will be enough to prevent a technical recession altogether, is unlikely.
Tariff troubles
After months of threats and vows to apply widespread tariffs, President Trump’s promises will be realised, and so will fears from investors, economists, businesses and citizens in the US and in all other countries affected. 25% tariffs on all imports from Mexico are coming into effect today. This is just one part of a trade war that extends to more than a dozen other countries and is expected to impact $3.3 trillion in imports (CNN, 2025).
However, these tariffs are particularly concerning for Mexico’s economy given its reliance on the US for trade. It stands to lose more because the US is its largest export market. The volume of this trade in 2024, was of $505 billion in Mexican exports to the US alone, and made up roughly 30% of its GDP (CNN, 2025). Although some tariff exemptions for Mexico were made, given the degree of its dependence on the US, it is unlikely to be able to make up for the coming losses from these tariffs by finding alternative trade partners.
The following chart shows Mexico’s top 5 trade partners and its dependency on US in trade:
Projections for 2025-2029 of the particularly large impact of Trump’s “day 1” tariffs on the Mexican economy relative to other key economies in the region are shown in this graph:
Growing pessimism
As a consequence of US trade policies which affect investment and consumption decisions in Mexico, as one of its largest trade partners, worries of an economic slowdown in 2025 have grown. Forecasts of stagnation have also formed due to cuts in public spending in line with fiscal consolidation plans and easing labour market conditions, among others (Mexico Business News, 2025). 2025 projections from UBS and Fitch Ratings predict no growth for Mexico for this year, very far from the minimum growth forecast of 2.5% published by the Mexican government (El País, 2025).
These fears have already started to materialise. Following a contraction in Q4 of last year, the Mexican economy slipped once again in January, shrinking by 0.2% (Araujo, 2025). It was the second consecutive monthly contraction, after a 0.4% fall in December 2024 (Allende, 2025).
This data supports increasingly pessimistic growth projections, which warn of a slowdown in its economy, and more specifically, of a technical recession.
A recession vs. a technical recession
In this context, it is first crucial to explain the distinction between a technical recession and a normal recession. A technical recession is defined by two consecutive quarters of negative GDP growth (Allende, 2025). By contrast, economists define a recession as a deeper, more pervasive and persistent decline in economic activity, which lasts for more than two quarters.
Talks of Mexico sliding into a recession currently refer to a technical recession, with the economy already having contracted in the last quarter of 2024 and currently on track to contract in the first quarter of 2025, which would confirm it (Reuters, 2025).
Policy adjustments
In monetary policy, last week, its central bank cut interest rates by 50 basis points to 9%. This was also the second consecutive interest rate cut by the Bank of Mexico and brought the rate down to its lowest level since September 2022 (Reuters, 2025). These two rate cut decisions were based on evidence of progress on inflation, which was lower than analysts expected, but also on data of cooling economic activity.
Furthermore, the Mexican government announced an 86.5% reduction in its fiscal deficit through public spending cuts, in order to begin its fiscal consolidation plan for 2025, also amid fears of an economic slowdown and geopolitical uncertainty (Allende, 2025).
Other factors and economic indicators
Some positive economic indicators, however, reduce the degree of the slowdown that is expected.
The Mexican peso has fallen for 4 days consecutively, as investors braced for the introduction of the tariffs on April 2nd. However, even though tariffs could limit the appreciation of the peso, UBS has recently concluded that the tariffs will not constitute a systemic risk to Mexico’s currency (El País, 2025).
In addition, Mexico’s foreign currency debt has been falling consistently. Currently, it stands at 30% of the total, falling significantly from the 80% registered three decades ago. Its public debt is also a positive indicator, since it represents 52% of its GDP, which is below the levels of debt seen in other key economies in Latin America such as Argentina, Brazl or Colombia. Lastly, it has built more solid macroeconomic foundations, such as a current account deficit below 0.5% of its GDP (El País, 2025).
These indicators have led UBS to reduce the expected contraction of Mexico’s economy for 2025.
Could it be avoided?
Others see its economic future less bright, such as JPMorgan, which stated that a ‘recession is unavoidable’ (Araujo, 2025). At the beginning of the year the OECD also warned of a deep recession in Mexico, with a contraction of 1.3% annually for 2025 (El País, 2025).
But once again, it is important to distinguish between a technical and a regular recession. While Mexico now confronts a significant risk of slipping into a technical recession because the quarter is almost finished and lost, a full-on recession in 2025 is not entirely inevitable. Continued fiscal and monetary policy interventions are needed to mitigate the full adverse impacts of the tariffs that come into effect today, but it is true that not much can be done about Mexico’s deep dependency on the US in trade and the consequent economic effects of this trade war, unless the President himself suspends them.
In any case, alarmist rhetorics of a full recession are not prudent, and should be shelved until data from Q1 of 2025 is available and the impact of the tariffs is examined.
References
Allende, M. (2025, March 28). Economy Slowdown Sparks Recession Fears: Finance Week. Mexico Business News. Retrieved from https://mexicobusiness.news/finance/news/economy-slowdown-sparks-recession-fears-finance-week?
Araujo, G. (2025, March 24). As Mexico's economy weakens, some see a recession as unavoidable. Reuters. Retrieved from https://www.reuters.com/world/americas/mexico-inflation-slows-activity-weakens-ahead-rate-decision-2025-03-24/?
CNN. (2025, March 5). Trump’s tariffs could plunge Mexico and Canada into a recession. CNN. Retrieved from https://edition.cnn.com/2025/03/04/americas/trump-tariffs-mexico-canada-recession-intl-latam/index.html
El País. (2025, March 31). Alertas de recesión se “intensifican” en México pero sin una “crisis profunda”. El País. Retrieved from https://elpais.com/economia/2025-03-31/alertas-de-recesion-se-intensifican-en-mexico-pero-sin-una-crisis-profunda.html?
Mayberry Investments Limited. (2025). Mexico’s Economy Faces Possible Technical Recession Amid Tariff Turmoil. Retrieved from https://www.mayberryinv.com/mexicos-economy-faces-possible-technical-recession-amid-tariff-turmoil/
Mexico Business News. (2025, March 25). Mexico's Economy Slips Again Raising Recession Fears. Mexico Business News. Retrieved from https://mexicobusiness.news/finance/news/mexicos-economy-slips-again-raising-recession-fears?
Oxford Economics. (2025). Trump’s day-one tariffs could tip Mexico into recession. Research Briefing. Retrieved from https://www.oxfordeconomics.com/resource/trumps-day-one-tariffs-could-tip-mexico-into-recession/
Reuters. (2025, March 27). Bank of Mexico cuts interest rate as trade war stokes recession fears. Reuters. Retrieved from https://www.reuters.com/markets/rates-bonds/bank-mexico-cuts-interest-rate-flags-trade-economic-uncertainty-2025-03-27/?
Reuters. (2025, March 11). Tariff chaos could push Mexico into technical recession. Reuters. Retrieved from https://www.reuters.com/world/americas/tariff-chaos-could-push-mexico-into-technical-recession-2025-03-11/
Written by Laura Rebollo
