January 31, 2025
Mexico’s economy contracted more than anticipated in the fourth quarter, according to preliminary data from the national statistics agency INEGI released on Thursday. This marks the first quarter-on-quarter decline in over three years.
The contraction comes as Mexico braces for potential U.S. import tariffs, which could further impact its economy already strained by tight monetary conditions. This is ahead of a crucial interest rate decision by the central bank next week.
INEGI reported that Latin America’s second-largest economy shrank by 0.6% in the fourth quarter compared to the previous three months, entering negative territory for the first time since Q3 2021. This decline was steeper than the 0.2% drop forecasted by a Reuters poll of economists.
The primary sector, including farming, fishing, and mining, saw an 8.9% quarter-on-quarter decline, dragging down the overall economy. Secondary or manufacturing activities also fell by 1.2%.
“This is a terrible report, consistent with the overall narrative of slowing growth as tighter financial conditions take a toll and external conditions become less favorable,” said Andres Abadia, an economist at Pantheon Macroeconomics.
On an annual basis, Mexico’s GDP grew by 0.6% in the October-December period, the slowest pace since Q1 2021 and well below the 1.2% increase predicted by a Reuters poll.
Markets are now closely monitoring the potential imposition of U.S. tariffs on Mexico and Canada, which could significantly impact the Mexican economy and its currency due to the country’s extensive trade ties with the United States.
The latest GDP data may bolster the case for the Bank of Mexico to accelerate its monetary easing next week, according to Capital Economics economist William Jackson. However, this would depend on avoiding U.S. tariffs.
In December, the central bank lowered its benchmark interest rate by 25 basis points to 10% and indicated that larger rate cuts could be considered in future meetings, given progress on inflation.
“Banxico has tended to view weak GDP outcomes as justification for rate cuts,” Jackson noted. A 50-basis-point cut “now seems the most likely outcome, provided U.S. import tariffs are not imposed in the coming days.”
For the full year, Mexico’s GDP grew by 1.5% in real terms, with seasonally adjusted growth at 1.3%, according to INEGI.
Source: (Reuters)
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