San Francisco Frontiers - Mexican economy shrinks for first time in three years

Gross domestic product (GDP) shrank by 0.6 percent in the three months to December from the previous quarter, the first decline since 2021, the national statistics agency INEGI reported in a preliminary estimate.

For the whole of 2024, Latin America's second-largest economy grew by 1.3 percent compared with the previous year, it said.

The contraction "puts Mexico on the brink of a recession," warned Gabriela Siller, head of economic analysis for the financial group Banco BASE.

"The economic slowdown is expected to continue in 2025 with growth of just 0.8 percent," she added.

A recession is generally defined as two consecutive quarters of economic contraction.

According to the consultancy firm Capital Economics, the "much larger-than-expected" drop in GDP is likely to raise expectations of a 50-basis-point interest rate cut, to 9.50 percent, when the Mexican central bank meets next week.

"But that's all contingent on Mexico avoiding US import tariffs (and a sharp fall in the peso) before then," it told clients, noting that the agriculture sector was particularly weak in the fourth quarter.

Trump has threatened to impose 25-percent tariffs on Mexican and Canadian goods starting on Saturday because of a failure to halt illegal immigration and drug trafficking.

Mexican President Claudia Sheinbaum said this week that she was confident that her country could avoid the measures.

"We don't think it will happen," she said.

"And if it does happen, we also have our plan," Sheinbaum added, declining to give details.

During his first term (2017-2021), Trump successfully used the threat of tariffs to pressure Mexico to reduce the number of Central American migrants arriving at the southern US border.

In theory, Mexico and Canada should be protected against US tariffs by a regional free trade agreement that was renegotiated under Trump.

The United States-Mexico-Canada Agreement (USMCA), which replaced the previous NAFTA accord on July 1, 2020, is due to be reviewed by July next year.

Sheinbaum recently presented a plan to replace Chinese imports with domestically produced goods -- an apparent bid to ease Washington's concerns that Chinese companies want to use Mexico as a backdoor into the United States.

Mexico replaced China in 2023 as the largest trading partner with the United States, which buys more than 80 percent of its exports.

S.Hall--SFF