Our economic outlook for Mexico

We continue to expect Mexico’s economic outlook to improve in 2027, supported by a solid U.S. economy and Mexico’s close integration with U.S. manufacturing. However, the external environment has become more challenging, as financial conditions have tightened amid higher global interest rates. Geopolitical tensions, elevated commodity prices, and a stronger U.S. dollar add further uncertainty, creating downside risks to growth and upside risks to inflation.

Demand from the U.S. should continue to support Mexico’s economy, particularly through export-oriented manufacturing. Preliminary data show that GDP grew 3.2% year over year in the third quarter, with broad-based gains across industry and services. Retail sales, industrial production, and formal job creation have also strengthened, although softer consumer confidence and lower labor-force participation suggest that the improvement is not yet broad-based. Given the stronger-than-expected third-quarter GDP result, we have raised our 2026 growth forecast from 1.3% to 1.4%. We have also lowered our year-end unemployment forecast from 3% to 2.8%, following another reading below expectations in September.

Trade policy uncertainty remains a meaningful headwind. The United States-Mexico-Canada Agreement remains in force, but the absence of a long-term extension has moved the pact into annual reviews. Continued uncertainty over the broader agreement is weighing on investment and business confidence.

Inflation has evolved broadly in line with our expectations, although headline and core inflation have followed different paths in recent months. Headline inflation bottomed at around 3.1% in July before rising to 3.75% in October, as fresh food prices rebounded from unusually low levels. Core inflation, by contrast, has declined over the course of the year, to 3.8% in October. Persistently elevated services inflation continues to slow its convergence toward target. Economic slack should support further disinflation, but recent peso depreciation and risks from food prices, trade disruptions, and geopolitical developments warrant continued caution.

The Bank of Mexico (Banxico) lowered its policy rate by 25 basis points to 6.25% at its November meeting. The majority judged that disinflation has continued, economic slack will persist, and exchange-rate pass-through should remain limited, while emphasizing that the existing degree of monetary restriction remains effective. The decision was divided, with two board members preferring to keep the rate at 6.5%. Banxico indicated that keeping the rate at its new level for a prolonged period would support inflation’s descent to target. We have therefore lowered our policy-rate forecasts for both year-end 2026 and year-end 2027 from 6.5% to 6.25%. For now, we do not expect additional cuts based on the current guidance.

Thor Solanes contributed to this report.