Mexico central bank slashes growth forecasts citing significant weakness

The Bank of Mexico (Banxico) has significantly lowered its GDP growth forecasts for 2024 and 2025, now projecting 0.1% and 0.9% respectively, citing sluggish domestic activity and uncertainties surrounding U.S. trade policy. While some governors dismissed the likelihood of an imminent recession, the central bank acknowledged that the economy is undergoing a period of "significant weakness." Despite resilient exports, Banxico expressed concern over the potential negative impact of U.S. tariffs on external demand and noted that recent inflationary pressures, though concerning, are not expected to derail the path to its long term inflation target of 3.0% by Q3 2026.

Analysis

The Bank of Mexico (Banxico) has substantially revised down its economic growth forecasts, signalling a period of significant weakness for the Mexican economy. The central bank's quarterly report detailed a cut in the 2024 GDP growth projection to a mere 0.1% from a previous estimate of 0.6%, and halved its 2026 GDP growth forecast to 0.9% from 1.8%. These downgrades are attributed to sluggish domestic activity and pervasive uncertainty surrounding U.S. trade policy. While Banxico governors, including Victoria Rodriguez and Jonathan Heath, stated they do not foresee an imminent recession, they characterized the economy as "stagnant" and undergoing "significant weakness." Mexican exports have demonstrated resilience, partly due to the trilateral trade agreement with the U.S. and Canada, yet Banxico expressed concerns that U.S. tariffs could negatively impact the U.S. economy, thereby reducing external demand for Mexican goods, and noted that trade policy uncertainty itself hinders investment. The economy grew by a marginal 0.2% in Q1 2024, narrowly avoiding a technical recession, but analysts highlight underlying frailty in manufacturing and services. In response to this economic weakness, Banxico recently cut its benchmark interest rate by 50 basis points to 8.5%, the third such consecutive reduction, and anticipates further easing. Despite inflation accelerating in early May beyond the target range, Banxico maintains its projection for headline inflation to average 3.3% in Q4 and converge to its 3.0% target by Q3 2026, although core inflation is now expected to average 3.4% in Q4 of this year, a percentage point higher than prior forecasts, and remain elevated until Q1 2026.

Key Decisions for Investors

• Investors should adopt a cautious stance towards Mexican assets highly exposed to domestic demand, reflecting Banxico's sharply reduced GDP growth forecasts to 0.1% for the current year and 0.9% for 2026.
• Closely monitor developments in U.S. trade policy and their potential impact on U.S. economic activity, as these are identified by Banxico as key headwinds for Mexican external demand, investment, and overall business sentiment.
• While Banxico's recent 50bp rate cut to 8.5% and expectation of further easing may present opportunities in fixed income, the outlook for sticky core inflation and fragile growth warrants careful assessment of the pace and depth of the monetary loosening cycle.