Mexico's economy contracted in the fourth quarter for the first time in over three years, as official data released on Friday by the statistics agency INEGI showed a 0.6% decline in the October-to-December period compared to the previous quarter, meeting market expectations. This marked the first sequential decrease since the third quarter of 2021, reflecting ongoing challenges for Latin America's second-largest economy.
On an annualized basis, Mexico's economy grew by 0.5% in the fourth quarter compared to a year earlier, resulting in a full-year growth rate of 1.2%, the weakest since 2020 amid the impact of the COVID-19 pandemic. The primary sector experienced an 8.5% decline, while manufacturing decreased by 1.5%, offset by a 0.2% growth in services.
Andres Abadia of Pantheon Macroeconomics noted, "These figures confirm that growth slowed in Q4 due to several headwinds, including tight financial conditions, heightened external risks, domestic uncertainty, and adverse weather." The slowing economic activity, along with easing inflation, is expected to lead to lower borrowing costs in Mexico, where the benchmark interest rate currently stands at 9.50%.
Regarding future monetary policy, the central bank hinted at further rate adjustments, indicating a possibility of similar magnitudes to the most recent 50-basis-point reduction. However, concerns persist over the looming threat of a tariff war, particularly with the United States, Mexico's largest trading partner.
Additional data from INEGI highlighted a 1% decrease in economic activity in Mexico in December, with a soft performance in the service sector exacerbating worries about growth. Grupo Financiero BASE economist Gabriela Siller commented, "The decline in the services sector in December increases the likelihood that Mexico is in a recession."
The Bank of Mexico projects a slowdown in growth to 0.6% this year, with a potential of slipping into recession with a contraction of up to 0.2%.