Banxico Flags Recession Risks as Tariffs Hit External Demand

Members of Mexico Central Bank’s (Banxico) Governing Board have expressed concerns about an increased likelihood of a recession in Mexico, according to the minutes of the monetary policy meeting held on Mar. 27.

One board member noted that a potential recession would widen the output gap and exacerbate slack conditions in the economy. Another highlighted that persistent and elevated tariffs could further weaken external demand, adding to the economic strain.

Other concerns raised included softness in consumption and investment. A participant noted that under such circumstances, both nominal and real exchange rates could come under depreciation pressures.

During the meeting, the board unanimously decided to lower the benchmark interest rate by 50 basis points to 9%, citing signs of a potential economic downturn. Several financial institutions, including XP, Deutsche Bank, Finamex, and Santander, recently downgraded their 2025 GDP forecasts. XP projects a contraction of 0.5%, Deutsche Bank anticipates a 0.4% decline, while Finamex and Santander estimate decreases of 0.3%.

Board members also noted that domestic economic activity had weakened further in the first quarter of 2025. One referenced the Monthly Indicator of Economic Activity (IGAE), which recorded a second consecutive monthly decline in January, with preliminary estimates suggesting continued contraction in February.

A member pointed to Mexico’s heavy reliance on the United States, which accounts for approximately 80% of its exports, as a significant vulnerability amid shifts in global trade dynamics.

Regarding Banxico’s economic outlook, one participant suggested activity could trend toward the lower end of the central bank’s latest quarterly projection range of -0.2% to 1.4%, with a central estimate of 0.6%. While not necessarily predicting a negative result, another board member observed that the estimated output gap remains negative. Indicators of economic slack, particularly those based on principal components, also reflect weakening consumption.