Mexico's Economy Slips Again, Raising Recession Fears

Mexico’s economic activity contracted for the second consecutive month in January, raising concerns about a slowdown and increasing the likelihood of a technical recession, which is defined as two consecutive quarters of negative growth. Data from the National Institute of Statistics and Geography (INEGI) showed that the Global Indicator of Economic Activity (IGAE) fell 0.2% month-over-month in January, following a 0.4% decline in December.

The economy also shrank 0.1% compared to January 2024, following ca ontraction in the fourth quarter of 2024, marking the first quarterly decline since the COVID-19 pandemic. Analysts now anticipate further downturns, with JPMorgan stating that “a recession is unavoidable.” 

A Banamex analysis attributed the latest decline to a 0.4% drop in industrial production, while primary sector activities grew 3.1% and services remained flat. Given these trends, Banamex projects a 0.5% GDP contraction for the first quarter of 2025, following a 0.6% decline in the previous quarter. The firm maintained its full-year GDP growth forecast at 0.0%.

“For this year, we expect economic stagnation due to contracting public spending in line with fiscal consolidation plans, easing labor market conditions, restrictive real interest rates, and uncertainty surrounding domestic and US policies that weigh on investment and consumption decisions,” Banamex stated.

Private consumption could still see some support from low unemployment, wage growth, social assistance programs, and peso-denominated remittances. However, discretionary spending may moderate, while public investment remains constrained by fiscal consolidation, and private investment faces high financing costs and policy uncertainty, according to Bx+. 

Banco Base warned that the contraction in January increases the probability of a negative GDP result for the first quarter. “Assuming economic activity grew 0.2% in February, as suggested by the Leading Economic Activity Indicator, and remained flat in March, Mexico’s GDP would reflect a 0.7% quarterly decline,” the bank reported. If confirmed, this would mark the first annual GDP contraction since the first quarter of 2021.

Investment prospects remain uncertain as both public and private sector spending face challenges. Banamex expects economic stagnation in 2025, citing reduced public spending due to fiscal consolidation, high real interest rates, and uncertainty surrounding domestic and US policies. “For this year, we project an economic stagnation, as public spending contracts, labor market conditions ease, and investment decisions remain affected by political uncertainty,” the bank noted.

Despite these challenges, some factors continue to support employment and consumption. Analysts at Bx+ highlighted that private consumption could benefit from low unemployment, wage growth, and peso-denominated remittances. However, discretionary spending may weaken further as households become more cautious amid economic uncertainty.

In terms of the labor market, formal employment growth in Mexico remained slow in February 2025, with 119,385 workers joining the social security system. This figure represents a 23.6% decrease compared to the same month in 2024, according to data from the Mexican Social Security Institute (IMSS).

The institution reported that registered workers reached 22.4 million, the highest figure recorded by the institute. Over 192,552 formal jobs were created in the first two months of 2025, a growth rate of 0.9%. Of the total registered positions, 86.8% are permanent jobs while 13.2% are eventual jobs. However, this follows the loss of 405,259 jobs in December 2024.

Meanwhile, inflation continued to slow, reinforcing expectations of further interest rate cuts by Mexico’s Central Bank (Banxico), as previously reported by MBN. Consumer prices in the first half of March rose 3.67% year-over-year, below the expected 3.75%. Core inflation, which excludes volatile food and energy prices, slowed to 3.56% from 3.63% the previous month. These figures remain within the central bank’s 2%-4% target range, allowing policymakers room to ease monetary conditions.

JPMorgan and a majority of analysts polled by Reuters expect Banxico to implement a second consecutive 50-basis-point cut this week, reducing the benchmark interest rate to 9%. The central bank has indicated it will consider similar adjustments if inflation remains under control.

“The economy is becoming more sensitive to tighter financial conditions and a less favorable external backdrop,” said Andrés Abadía, chief Latin America economist, Pantheon Macroeconomics, for Reuters. “The recent figures support Banxico continuing to cut rates at upcoming meetings, starting with a 50-bp move this week.”