Mexico's Economy Faces Challenges Amid Trade Tensions and Sectoral Pressures
Economy of Mexico stalls in May due to contraction in services sector
The Mexican economy is currently experiencing a subdued outlook, influenced by various factors such as U.S. tariffs, trade uncertainty, and sector performance.
Key Factors Impacting the Economy
- U.S. Tariffs and Trade Uncertainty:
- The threat of increased U.S. tariffs has placed significant pressure on Mexico's economy. A 25% tariff imposed in April has led some auto plants to halt production temporarily, and further action could exacerbate job losses and economic stagnation. The World Bank cited high trade uncertainty as a major factor in its decision to slash Mexico's growth forecast to 0.2% for 2025.
- Sector Performance:
- Primary Sector: The primary sector, which includes agriculture and mining, has shown some resilience. Mexico's primary sector grew 3.6% in May compared to April, providing temporary support to the economy. However, this momentum is not strong enough to overcome broader economic challenges.
- Secondary Sector (Manufacturing): The automotive sector, a significant component of Mexico's secondary sector, has shown resilience due to exemptions under the USMCA and strong U.S. demand. However, ongoing trade tensions and tariffs threaten this stability.
- Services Sector: There is limited specific information on the services sector's performance, but overall economic uncertainty is likely impacting its growth.
- Construction and Mining Industries:
- The construction industry in Mexico grew 2.8% on a month-over-month basis in May, but contracted 1% annually. The mining industry, on the other hand, declined 8.4% annually in May.
Economic Projections
- GDP Growth: Forecasts for Mexico's GDP growth vary, with the World Bank predicting 0.2% growth and the IMEF maintaining a forecast of 0.1%, though warning that the outlook could worsen under increased tariff pressures. The IMF expects a slight contraction of 0.3%.
- Monetary Policy: The Bank of Mexico has cut its policy rate to 8% and is expected to further ease monetary policy, potentially reaching 7.5% by year-end.
Challenges and Risks
- Remittances: A decline in remittances, exacerbated by peso appreciation, has reduced household purchasing power and contributed to economic headwinds.
- Job Market: Formal job losses have increased, with a net loss of 139,444 jobs in the second quarter, raising concerns about potential recessionary trends if not reversed.
President Sheinbaum has rejected forecasts from international financial organizations, asserting that they don't take into account federal government efforts to stimulate the economy, including through its Plan México initiative. The U.S. President Donald Trump recently doubled the duty on steel and aluminum to 50%, and announced plans to impose a 30% tariff on "Mexican products sent into the United States" starting August 1, causing further uncertainty for investors.
The services sector contracted 0.4% in May compared to the previous month, while the electricity, water, and gas industry grew 0.4%. The cultural and sporting services industry shrank 3.4% in May. The manufacturing industry, on the other hand, grew 1.4% compared to May 2024. Mexico's economy did not grow in May compared to the previous month, and expanded by 0.4% in annual terms.
Overall, Mexico's economy faces significant challenges due to trade tensions, sectoral pressures, and broader economic uncertainty.
- The ongoing trade tensions, such as the potential 30% tariff announced by U.S. President Donald Trump on "Mexican products sent into the United States", could further amplify the challenges faced by Mexico's business sector and economy.
- Amid the subdued economic outlook, news about the performance of key sectors, including finance, manufacturing, and services, will be closely monitored by investors, as their resilience or vulnerability can significantly impact the stability of Mexico's economy.
