Mexico Eyes Modest Recovery Amid Trade Hope and Risk Factors

There’s no doubt the Mexican economy is stuck. Uncertainty on the domestic and external fronts pushed it into a downward spiral of uncertainty, paralyzed investment, and spurred low employment and weak consumption. Though it is way too early to say definitively, it seems that sentiment has improved recently, and that could set the stage for an incipient economic recovery.

President Donald Trump’s aggressive and erratic trade and migration policies shook Mexico’s economic prospects. Furthermore, the country in recent months has experienced several transformations of its institutional framework, from the reform of the judiciary to the elimination of autonomous economic competition watchdogs in key sectors, raising concern regarding the rule of law.

All the above pushed the Mexican economy into a negative spiral. First, business confidence diminished throughout 2024, especially in the third and fourth quarters, and in the first four months of 2025, marking a 31-month low  in April. As confidence waned, fixed investment took a dive, contracting 3% YoY in the last quarter of 2024 and 5% between January and March 2025. Responding to a chaotic economic environment and increasing labor costs, businesses halted hiring. Formal employment, measured as the number of jobs registered at the Mexican Institute for Social Security, has barely averaged 0.6% YoY growth this year. Households responded to the slowdown in the job market and the spike in economic uncertainty by putting off spending, mainly on goods. Now, if demand perceived by firms weakens, investment plans will be cancelled or further postponed, pushing employment lower, which will also negatively affect private consumption, and so on.

To make things worse, economic policy has little to no room to stop this descending spiral. First, the new government reaffirmed its commitment to reduce this year’s fiscal balance by almost 2 percentage points of the gross domestic product (GDP). Hence, fiscal policy is actually becoming more restrictive. Secondly, despite the Bank of Mexico (Banxico) significantly lowering its benchmark interest rate, it still is clearly above its estimated “neutral” levels. Moreover, inflation has spiked recently and, if it continues to show an upward trend, the scope for further rate cuts will narrow.

On the other hand, Mexico maintains relatively sound macroeconomic conditions. Despite last year’s increase, the debt to GDP ratio is still manageable, and the Ministry of Finance affirmed its 2025-2026 fiscal goals. Also, the new administration reiterated Banxico’s autonomy as an essential pillar of its economic plan. Additionally, the country’s external position remains strong: the current account deficit as a share of GDP shrunk last year to 0.1% and is lower than the deficits presented by many emerging countries; international reserves are equivalent to almost four months of imports; and the International Monetary Fund (IMF) granted Mexico a flexible credit line. All these factors can compensate for the potential institutional weakening derived from the constitutional reforms cited above.

What is more, the drop in sentiment apparently has stopped and could be at an inflection point. This could be attributed mainly to the robustness of the macro landscape, and the protection granted by the USMCA (the North American free-trade agreement) to Mexican – and Canadian – exports to the United States, while other countries, especially China, are facing higher tariffs and barriers from the Trump administration. In fact, the global business confidence index rebounded marginally in May, though it remained below 50 points (the threshold between contraction and expansion). Specifically, confidence in the manufacturing sector, which is the sector most sensitive to foreign trade, improved, while the subindexes for construction and services continued to decline.  Consumer confidence increased in May after falling between November and April, marking a five-month high. The country’s expectations index and others related to concrete consumption decisions (affordability of nondurable and durable goods) notably improved.

Financial markets are also showing a clearer improvement in sentiment toward Mexico. This is not only due to solid macroeconomic fundamentals and a preferable treatment of Mexican products in the US market but also due to the tendency shown by global investors to reduce exposure to US assets as a result of increasing economic policy uncertainty. Mexico’s equity index (IPC) has rallied 17% YTD, outperforming its US counterpart (S&P 500), which has gained barely more than 2%. Also, the Mexican peso has appreciated 8% versus the US dollar.

Should sentiment improve further, economic activity might rebound in the not-so-distant future. Uncertainty on the trade front could recede further, especially if the revision of the USMCA takes place in the coming months, although concerns regarding the erosion of the institutional framework will linger. In any case, and at the very least, some export-related investments should unlock in the near future, offering some scope for an economic recovery.