Background on Mexico’s Economic Situation
Mexico narrowly avoided a technical recession in the first quarter of 2025, thanks to its export sector’s performance, according to the Global Offer and Demand Quarterly (ODGT) indicators released by Mexico’s National Institute of Statistics and Geography (Inegi).
Key Economic Indicators
- Exports: Grew by 1.1% compared to the last quarter of 2024.
- Imports: Fell by 4.3% during the same period.
- Domestic Demand: Dropped by 1.1%, with private consumption decreasing by 0.4% and fixed investment plummeting by 4%.
Understanding the Dynamics
Two key observations within Mexico’s aggregate supply and demand support this scenario:
- Export Growth vs. Import Decline: Mexico’s exports expanded more than its imports compared to the last quarter of 2024, with a 1.1% growth versus a 4.3% drop in imports.
- Domestic Demand Weakness: Private consumption fell by 0.4%, and fixed investment plummeted by 4%. The public investment component saw a significant drop, falling 7.8% and private investment by 3.6%, as Mexico’s government seeks to reduce its fiscal deficit, which reached 5.7% of the Gross Domestic Product (GDP) in 2024.
Impact of US Trade Policy Tightening
During Q1 2025, Mexican exports benefited from a “stock-up effect” in the United States, its primary market. This was due to consumers and businesses bolstering inventories in anticipation of higher import costs following President Donald Trump’s announcement to impose reciprocal tariffs starting April 2nd.
- Anticipated Tariffs: The US planned to enforce a 25% tariff on automotive imports and had already implemented a 25% tariff on steel and aluminum imports since mid-March.
- Exemptions for Mexico and Canada: The US later granted exceptions to automotive shipments from Mexico and Canada based on the US content of their exports and adherence to T-MEC origin rules.
Export Sector’s Role in Economic Growth
With this external boost, net exports pulled the GDP growth during Q1 to 0.2%, preventing Mexico from experiencing back-to-back quarters of decline after a 0.7% contraction from October to December 2024.
The relative weights of internal and external demand components concerning the GDP explain this growth mathematics.
- Internal Demand Components: Private consumption (68.6%), government consumption (11.3%), and gross fixed capital formation (23%).
- External Demand Components: Export contribution to GDP (39.4%) and import contribution (39.3%), illustrating their significant impact on the economy.
Breakdown of Q1 GDP Growth
Mexico’s GDP grew by 0.8% year-over-year in Q1 2025, down from 1.6% in the first quarter of 2024.
- Growth Components (in percentage points):
- -0.5 pp: Private consumption
- +0.2 pp: Government consumption
- -1.3 pp: Gross fixed capital formation
- +5.7 pp: Net exports (exports – imports)
- -0.02 pp: Inventory variation
- Statistical Discrepancy: -3.4 pp
Key Questions and Answers
- Q: What factors contributed to Mexico avoiding a recession in Q1 2025?
- Q: How did US trade policy changes impact Mexican exports?
- Q: What role did domestic demand play in Mexico’s Q1 2025 performance?
A: The export sector’s growth, driven by a “stock-up effect” in the US market, helped Mexico avoid a technical recession.
A: Anticipating higher import costs due to tariffs, US consumers and businesses increased inventories, benefiting Mexican exports.
A: Despite a 1.1% decline in domestic demand, the export sector’s growth outweighed this weakness.
