Mild Recession in Mexico: Takeaways from our 2024–2025 Outlook

Delia Paredes & Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

We have built three forecast scenarios for the Mexican economy and markets in the next eight quarters. What follows are our main takeaways. For the full forecast report in PDF, click here or visit our Research page.

Main Takeaways

Our outlook for Mexico hasn’t changed substantially. Growth in 2023 was 3.2%, a bit slower than we had expected, the economy having lost momentum in the final quarter.

We envision three scenarios for the Mexican economy: our base case, Mild Recession in Mexico; a rosier scenario, Soft Landing in Mexico; and a gloomier one, Hard Landing in Mexico. What distinguish our three scenarios are our assumptions as to which global scenario we are in and how Mexico’s June elections will play out. They map to three distinct Banxico rate spreads over the Fed rate, with consequences for Mexico’s exchange rate.

In all three cases, fiscal policy is expansionary in 2024 and restrictive in 2025, and Banxico cuts rates in tandem with the Fed.

In our base case, Mild Recession in Mexico (subjective probability: 65%) we assume that the U.S. economy will experience a soft landing, meaning, it will slow sharply in the second half of 2024 before picking up again in 2025. We assume further that the June elections in Mexico will preserve the status quo: Morena will win the presidency but will fail to build a supermajority in Congress; the new administration will be unable to push through its reform agenda.

To build our upside-risk scenario, Soft Landing in Mexico (probability: 25%), we assume that the U.S. economy won’t ultimately land, although it will slow down some this year before reaccelerating. Also, that opposition candidate Xóchitl Gálvez will win the presidential elections in an outcome that will greatly improve the business climate, but that the opposition will fail to garner a supermajority in Congress. Mexico’s economy achieves a soft landing in this scenario.

Finally, in Hard Landing in Mexico, we assume that the global economy will take a roller coaster ride: the U.S. economy will strengthen further this year, and U.S. inflation will resurge. Moreover, Claudia Sheinbaum not only will be voted Mexico’s first female president but also will manage to cobble together a supermajority in Congress. The Fed will tighten its stance further, leading to a recession in 2025. With Sheinbaum able to push through her agenda, the business climate will deteriorate sharply. Mexico experiences a deeper contraction than in our base case. We see this as the least likely scenario of the three (probability: 10%).