OECD Economic Outlook, Volume 2025 Issue 2

Mexico

The economy is projected to grow by 1.2% in 2026 and 1.7% in 2027, after 0.7% in 2025. Low unemployment and easing inflation will support consumption. Public consumption and investment will remain subdued, given ongoing fiscal consolidation. Exports will be dampened by higher tariffs and uncertainty. Declining interest rates will provide some support to investment, but its recovery is expected to be gradual, reflecting persistent domestic and international uncertainty.

Implementing a medium-term fiscal framework would help reduce the deficit and create space for productivity-enhancing investments, particularly in education. To ensure that inflation decreases towards the 3% target, the central bank should maintain a prudent and data-dependant easing cycle. Streamlining and digitalising business regulations would facilitate firm creation and growth, foster competition and support job creation.

Activity is softening

After remaining resilient during the first half of 2025 despite heightened global uncertainty, economic activity has weakened, with GDP contracting by 0.3% in the third quarter (seasonally adjusted). Private consumption is moderating in line with a slowdown in formal job creation, particularly within the manufacturing sector. Automative exports have weakened, whereas non-automotive manufacturing exports have been resilient so far, supported by solid demand from the United States. Private investment continues to be subdued, reflecting high uncertainly. Headline inflation eased to 3.6% in October (year-on-year), while core inflation has stabilised above 4%, the upper limit of the inflation target range. Goods inflation has edged up, whereas services inflation is trending down, albeit gradually. Unemployment, at 3.0% in September, remains near historically low levels, although labour force participation has recently declined. The informality rate remains close to 55% of total employment.

Mexico is an open economy with strong trade linkages to the United States, which accounts for over 80% of exports. The United States–Mexico–Canada Agreement (USMCA) has served as an important shield against rising trade restrictions and ongoing uncertainty. Most exports compliant with the USMCA face a 0% tariff, with their share increasing from 50% at the beginning of the year to close to 80% recently. Non‑compliant exports are assumed to continue facing a 25% tariff throughout 2026-27. Automobiles, automobile parts, trucks and trucks components are also assumed to be subject to a 25% tariff rate. The projections also assume a 50% tariff on United States imports of steel and aluminium products and on semi-finished copper products and derivative products intensive in copper.

Mexico

1. Data shows 3-month centered moving averages.

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

Source: Banxico.

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Mexico: Demand, output and prices

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Monetary policy is easing and fiscal consolidation has started

The central bank has continued its monetary easing cycle, lowering the policy rate to 7.25% in November. As economic activity moderates, price pressures are expected to ease, although further reductions in the policy rate should remain data-dependent and proceed once there is clear evidence that inflation is on a path back to the 3% target. Based on OECD inflation projections, the policy rate could reach 6.25% by the end of 2026. After widening to 4.9% of GDP in 2024, the highest level in 35 years, the budget deficit is expected to narrow to 3.6% in 2025 and 3.2% by 2027.

Growth will remain modest amid high uncertainty

The economy is projected to expand by 1.2% in 2026 and 1.7% 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 efforts to reduce the fiscal deficit. Export growth will be dampened by trade tariffs and high global uncertainty. Inflation will fall gradually. However, the outlook for both growth and inflation remains uncertain. Given Mexico’s high exposure to the US market, the projected US slowdown and tighter financial conditions may weigh more heavily than anticipated on exports and investment. Moreover, increased global risk aversion and exchange rate volatility could raise sovereign borrowing costs and further limit fiscal space. Potential tariff increases on Mexico’s imports from countries without trade agreements may generate additional price pressures. 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, reduce the deficit, and create fiscal space for additional spending in productivity-enhancing areas, such as education or digitalisation. Expanding vocational training would strengthen the availability of technical skills, boosting competitiveness and facilitating access to formal jobs. Streamlining and digitalising business regulations would facilitate firm creation and growth, foster competition and support job creation. Systematically applying cost-benefit analysis to infrastructure projects and targeting social programmes would enhance the efficiency of public spending. Given Mexico’s high vulnerability to climate change, strengthening adaptation, including by enhancing early warning systems and expanding climate risk insurance coverage, is a priority.