OECD Economic Outlook, Volume 2026 Issue 1

Mexico

The economy is projected to grow by 0.8% in 2026 and by 1.8% in 2027. Growth will be driven mainly by domestic demand, with private consumption supported by low unemployment. Lower interest rates will gradually support private investment but its recovery will be gradual amid persistent domestic and global policy uncertainty. Public consumption and public investment will remain constrained by ongoing fiscal consolidation. While exports of computer equipment will remain robust, other exports will be weighed down by trade tariffs, slowing growth in the United States and global uncertainty triggered by the evolving Middle East conflict. Inflation is projected to ease gradually to 3.2% in 2027.

Measures to address rising energy prices should become more targeted to the most affected households and SMEs and provide incentives for energy savings. Strengthening revenues and improving the quality of public spending would help safeguard fiscal sustainability and create space for productivity-enhancing public spending. Monetary policy should remain data-dependent, with the policy rate maintained at its current level until there is clear evidence that inflation is on a path back to the 3% target. Raising the share of electricity generated from renewable sources would advance decarbonisation, strengthen energy security, and enhance the country’s attractiveness for investment.

Activity has significantly weakened and inflation remains above target

After solid growth at the end of 2025, economic activity weakened sharply in early 2026 amid slowing domestic demand and heightened trade uncertainty, with GDP contracting by 0.6% (quarter-on-quarter, seasonally adjusted). The weakness was broad-based, affecting industry, agriculture and services. Private investment remains subdued while private consumption has moderated, in line with a slowdown in formal job creation. External demand has held up in some sectors, such as computer equipment, but automative exports remain weak. Despite weaker domestic demand, headline inflation rose to 4.5% (year-to-year) in April 2026, driven by persistent fruit and vegetables price pressures. Core inflation remains stable at around 4.3%, with persistent pressures in services. Twelve-month ahead inflation expectations remain above the 3% target.

Mexico is affected by the evolving Middle East conflict mainly through indirect channels, particularly via its impact on global growth. A retail fuel price stabilisation mechanism operates through the excise tax (IEPS), under which the government reduces or eliminates the tax when international fuel prices increase, thereby reducing cost pressures and supporting household purchasing power. The fiscal cost of the mechanism is covered by higher revenues stemming from higher oil prices. The projections assume that the mechanism remains in place over 2026-27. Due to its strong trade linkages to the United States, which accounts for over 80% of exports, Mexico is affected by the trade tariff introduced by the United States. Exports compliant with the USMCA face a 0% tariff, with their share having increased to around 90%. Non‑compliant exports face a 10% tariff. Automobiles, automobile parts, trucks and trucks components are subject to the 25% tariff rate. Exports of steel and aluminium products and on semi-finished copper products and derivative products intensive in copper face a 50% tariff rate. The joint review of the USMCA is scheduled to formally begin on 1 July 2026.

Mexico

1. The shaded area represents the central bank's inflation target range.

2. Private sector inflation expectations for the next 12 months.

Source: INEGI; and Banxico.

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Mexico: Demand, output and prices

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Monetary policy has eased further and fiscal consolidation is underway

The central bank has continued its monetary easing cycle, lowering the policy rate to 6.50% in May. As economic activity moderates, price pressures are expected to gradually ease. However, with increases in headline inflation in the first quarter of 2026, core inflation stable at around 4.3%, and upside risks from the evolving Middle East conflict, monetary policy should remain data-dependent, with the policy rate remaining at its current level until there is clear evidence that inflation is on a path back to the 3% target. Based on OECD inflation projections, the policy rate is projected to remain unchanged until the end of 2027. The budget deficit narrowed to 3.9% in 2025 and is expected to narrow further to 3.6% by 2026 and to 3.2% by 2027. Most of the planned fiscal adjustment is expected to come from expenditure reductions.

Growth will remain moderate

The economy is projected to expand by 0.8% in 2026 and 1.8% in 2027. Private consumption will be supported by low unemployment and declining inflation. Private investment will gradually benefit from lower interest rates, though it will remain constrained by high domestic and global uncertainty. Public investment is set to stay subdued as part of the efforts to reduce the fiscal deficit. Export growth would be dampened by trade tariffs, high global uncertainty and slowing growth in the United States. Inflation is projected to ease gradually. However, the outlook for both growth and inflation remains uncertain. A sharper-than-projected slowdown in the United States and tighter financial conditions could weigh more heavily on exports and investment. Higher fertiliser prices could also push up food inflation, complicating the disinflation process. In addition, increased global risk aversion and exchange rate volatility could raise sovereign borrowing costs and further constrain fiscal space. On the upside, a reduction in uncertainty, for example through a swift and successful renegotiation of the trade agreement with the United States and Canada, could provide stronger-than-expected support to investment and exports.

Boosting growth requires deeper structural reforms

Introducing a medium-term fiscal framework would strengthen expenditure planning and prioritisation, helping to improve the quality of public spending and channel additional public spending towards productivity-enhancing areas, such as infrastructure, education or digitalisation. This would also be facilitated by efforts to strengthen revenues, particularly through the immovable property tax. Expanding vocational training would increase the availability of technical skills, boosting competitiveness and facilitating access to formal employment. Streamlining and digitalising business regulations would support firm creation and growth, enhance competition and promote formal job creation.