MEXICO CITY—The “R” word is becoming increasingly popular in Mexico. On the same day that the U.S. reported a surprising quarterly GDP contraction in the first trimester of the year, data released by Mexico’s statistics institute, INEGI, showed an unexpected 0.2% quarterly economic expansion for the same period. Since this initial and seasonally adjusted reading followed a 0.6% decline in economic output in the last quarter of 2024, it appears Mexico barely escaped the curse of a so-called “technical recession” (i.e., two consecutive quarters posting negative changes).
This result, however, is unlikely to settle the issue, particularly in Mexico’s polarized political climate. It can be easily argued, for instance, that the positive reading is explained by an unusually strong 8.1% growth rate posted by the volatile primary sector. This serves as a good reminder that business cycles are a more complex affair than a simple rule of thumb would suggest. More importantly, a discussion about this issue should not be Mexico’s main priority.
Economic growth is the result of cyclical and secular forces. Ebbs and flows associated with the former are what we call expansionary or recessionary stages. Monetary and fiscal policies can help to smooth out these fluctuations. However, what ultimately determines a country’s standards of living are secular forces, or the long-term growth trend. China, for instance, experiences economic fluctuations like any other country, but since its secular growth rate is very high, the likelihood of its economy experiencing two consecutive quarters of negative growth is small. (Since 2010, it has never happened, despite the COVID-19 shock.) This shows, for instance, that for the “technical recession” criterion to apply, your secular growth rate should be modest—which is the case of developed economies and Mexico.
Therefore, when it comes to Mexico, two questions are fundamental.
The first involves cyclical conditions. Let’s skip the recession debate and go for an uncontroversial fact: The economy is in a downturn. The most recent figures for 9 out of 15 indicators that our team follows are showing worse-than-average rates of change, suggesting generalized, albeit heterogeneous weakness.
In the accompanying chart, we show the year-on-year rates of change for four variables: industrial activity, gross fixed investment, private consumption, and formal employment. As of February, three already displayed negative rates of change while formal employment—usually a lagging cyclical indicator with low levels of volatility—posted its lowest annual print (0.6%) since January 2023.
What’s behind these results? Local conventional wisdom often associates the end of a sexenio—the word used in Mexico to refer to a presidential term—with a slowdown in activity, as government expenditures, as well as private outlays associated with government contracts, decline.
So far this century, however, this has not been the case: GDP growth in the final year of a sexenio is either well above the average (Vicente Fox: 4.8% vs. 1.9%) or, at worst, equal (Enrique Peña Nieto: 2.0%). This, however, does not appear to be explained by fiscal policy: In some sexenios, the deficit ends higher than the average and, in some others, lower.
Under Andrés Manuel López Obrador (AMLO), however, the broad deficit (PSBR) shows a distinctive jump to 5.7% of GDP in the final year of his administration, compared to a 4.0% average. It was also the sexenio with the lowest average (1.1%) and final-year (1.2%) growth rates. In other words, Mexico appears to be getting less bang for the (fiscal) buck.
Which leads to a second, more relevant question: Is Mexico’s secular growth rate lower?
Secular growth rate
Unfortunately, this does appear to be the case. If we focus on the trend component of GDP, our team calculates that the average secular growth rate for the 1990s stood at 3.5%. In the first 15 years of this century, our estimate stands at 1.9%, but if we consider the 2018-2024 period (AMLO’s presidential term), it falls to 1.1%.
If we instead use the distribution of yearly GDP growth rates, the results are similar: The average and the median for the 2010-2017 period are both 2.7% YoY, while for 2018-2024 the corresponding values are 1.2% for the average and 1.7% for the median. Thus, growth data shows a skew to the right (higher), but more importantly, the entire distribution shifts to the left (lower prints); regardless of the stage of the cycle, it indicates less growth.
This shift to the left in the distribution of growth rates suggests a potential culprit. Numerous adverse events, including the COVID-19 pandemic and the election of Donald Trump, have marked recent years. In my view, we have assumed that they were essentially shocks, i.e., that their effects would fade away and the economy would eventually return to its previous path. In other words, we thought they would affect the cycle, rather than the secular growth rate, and policy-wise, we did not prepare accordingly.
We may be about to repeat this mistake. For an economy as open as Mexico’s (with a trade-to-GDP ratio of 68%), the ongoing trade war unleashed by the Trump administration is more than a short-term shock affecting growth rates. It constitutes a radical change in the rules under which Mexico has operated over the last 30 years and, as such, requires way more than cyclical—either monetary or fiscal—responses. On this front, in fact, Mexico appears to be moving backward, with an apparent bet on import substitution and an untimely judicial reform.
Meager growth for 2025
Needless to say, economic growth (or the lack thereof) is hugely significant at this juncture, as President Claudia Sheinbaum and her administration try to navigate the countercurrents emerging from U.S. tariffs and their consequences not only for Mexico but also north of the Rio Grande. With modest economic expansion in the first quarter, we expect Mexico’s GDP to grow by a mere 0.3% this year—barely escaping the criteria for a technical recession—and 1.2% in 2026. This is hardly the performance we need during these challenging times. If this scenario occurs, Sheinbaum will replicate the performance of her predecessor with average growth rates below 1%. The 1980s were often refered as the “Lost Decade”; the risk of this characterization applying to the 2020s is rising.
There are several things we should address on the local front. The coexistence of a highly competitive, modern sector and a traditional, informal economy is an example of the many misleading averages of the Mexican economy. Fiscal policy along with a coherent regulatory framework can help to close these gaps and thus increase productivity. Monetary policy can contribute to mitigating ciclycal headwinds as Banxico has done via rate cuts, most recently on May 15 with a 50 bps reduction. However, neither fiscal nor monetary policy can make up for deficiencies in the rule of law; whether they like it or not, political elites are also responsible for economic outcomes.
In this respect, we should not forget that geography provides us with a key advantage. Our grassroots efforts should be guided by the following realization: North America already is an integrated economic region. This is not the result of NAFTA or the USMCA. Rather, these treaties are the framework we have devised to govern a reality forged by myriad agents who interact every day across the border, driven by a simple but powerful principle: It makes good business sense. If we ensure that this is the mantra guiding decision-making by our leaders, growth will follow.
Sandra España and Eduardo Campos contributed to the research cited in this article, but the views expressed are solely of the author.
ABOUT THE AUTHOR
Sergio A. Luna
Reading Time: 5 minutesLuna is an economist from UNAM with an M.Sc and Ph.D. in economics from the University of London. He was chief economist at Citibanamex between 2005 and 2020. He’s now Grupo Financiero Mifel’s chief economist. His views and opinions are his own.
