OECD Economic Outlook, Volume 2025 Issue 1

Mexico

The economy is projected to grow by 0.4% in 2025 and 1.1% in 2026. Low unemployment and easing inflation will support consumption. Public consumption and investment will remain subdued, given ongoing fiscal consolidation. Exports will be dampened by tariffs, uncertainty and weaker global growth. Investment will be supported by declining interest rates but is expected to recover only gradually, reflecting high uncertainty.

Implementing a medium-term fiscal plan could help reduce the deficit gradually, creating room for investments that boost productivity, such as education. To ensure that inflation continues to decrease towards target, the central bank should continue its prudent and gradual easing cycle. Expanding dual vocational programmes would enhance technical skills availability, boosting competitiveness and facilitating access to formal jobs.

Agriculture has recovered but investment is slowing

Short-term indicators point to a partial improvement in economic activity during the first quarter of 2025, with GDP growing by 0.2% (quarter on quarter), after the 0.6% contraction in the previous quarter. The improvement was driven entirely by a rebound in the agriculture sector, following weather related disruptions at the end of 2024, while industrial production contracted and services stagnated. Non-residential construction is losing momentum after the completion of major infrastructure projects in the South, while investment in machinery and equipment is also easing amid high uncertainty. Private consumption has slowed, in line with slowing formal job creation. Exports remain subdued, constrained by persistent trade-related uncertainty. Unemployment, at 2.6% in March, remains at historically low levels, although participation has recently declined. Inflationary pressures are easing, although headline and core inflation rose to 3.9% (year-on-year) in April, driven by volatility in some food prices and seasonal variations in tourism-related services.

Mexico

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

Source: INEGI; and Banxico.

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Mexico: Demand, output and prices

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Mexico is an open economy with strong trade linkages to the United States, which accounts for over 80% of its exports. As a result, Mexico is particularly impacted by rising trade restrictions and ongoing uncertainty. The projections assume that Mexico’s exports to the United States that are compliant with the United States–Mexico–Canada Agreement (USMCA) face a 0% tariff, while non-compliant exports face a 25% tariff, both in 2025 and 2026. Around 50% of Mexico’s exports to the United States are currently compliant. Compliance is assumed to gradually rise towards 75% in 2026 by following the necessary steps, such as completing certifications of origin. Automobiles and automobile parts are assumed to be subject to a 25% tariff rate in 2025 and 2026, with the share of United States content excluded from this tariff. The projections also assume a 25% tariff on United States imports of steel and aluminium products from Mexico.

Monetary policy easing and fiscal consolidation should be gradual

The central bank has continued its monetary easing cycle, lowering the policy rate to 8.5% in May. Easing inflationary pressures, weakening economic activity and well-anchored inflation expectations support a further gradual, data-dependant reduction in the policy rate to 7% by the end of 2025, with additional cuts in 2026. After widening to 4.9% of GDP in 2024, the highest level in 35 years, the budget deficit is expected to fall to 3.5% in 2025, primarily through cuts in public investment, and to 3% in 2026. By the end of 2026, the public debt-to-GDP ratio is expected to be around 52% of GDP.

Growth will slow amid high uncertainty

The economy is projected to expand by 0.4% in 2025, before picking up by 1.1% in 2026. 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 efforts to reduce the fiscal deficit. Quarterly export growth will be dampened by trade tariffs and high global uncertainty. Both headline and core inflation will continue to fall gradually. However, the outlook for both growth and inflation remain uncertain. Given Mexico’s high exposure to the US market, the projected US slowdown in 2025-26 and tighter financial conditions may weigh further on external and investment demand. Moreover, increased global risk aversion and exchange rate volatility could raise sovereign borrowing costs and further limit fiscal space. On the upside, a reduction in uncertainty, such as through a swift and successful renegotiation of the trade agreement with the United States and Canada, could support investment and exports more strongly than currently anticipated.

Boosting productivity and adapting to climate change are priorities

Enhancing immovable property tax collection and improving tax administration, including through digitalisation, could help increase tax revenues and create fiscal space for additional spending in productivity-enhancing areas, such as education or digitalisation. Systematically applying cost-benefit analysis would enhance the efficiency of public spending. A comprehensive early childhood education and care system would facilitate women’s labour market participation. Encouraging private investment in renewable energy through supportive regulations could help turn Mexico's abundant renewable resources into a competitive advantage. Improving water management would strengthen Mexico’s adaptation to climate change, reduce operational risks and help to attract investment.