Economic Performance in Q1: US and Mexico Diverge
In the first quarter of the year, the US GDP fell by 0.3% on an annualized basis, while Mexico’s GDP grew by a mere 0.2%, narrowly avoiding a technical recession. Though the causes differ, both economies face shared risks.
The US economy is slowing due to tariffs imposed by Donald Trump and persistent inflation. Meanwhile, Mexico’s economy is propped up by external factors rather than internal dynamism: ongoing exports to the US, high but slowly declining remittances, foreign investment of $18,636 million (mostly reinvestment of profits rather than new capital), and a relatively stable exchange rate thanks to external factors such as interest rate differentials between Mexico and the US, controlled country risk perception, and adequate reserve levels. There’s also a restrictive monetary policy in place.
Two Possible Scenarios
Currently, two scenarios are outlined for both economies:
- Optimistic Scenario: The US recovers technically in Q2 due to stabilizing consumer spending, reduced distortions from advanced imports, and a controlled monetary policy by the Federal Reserve. In this context, Mexico could maintain a modest growth rate. Inflation would remain contained, and the peso would stay stable against the dollar. However, Trump’s erratic trade policies, threats of new tariffs, and isolationist rhetory would still cast uncertainty over consumption and investment decisions in both countries.
- Pessimistic Scenario: If US inflation remains high due to tariff costs and the GDP continues to contract, the US would formally enter stagflation – economic stagnation, rising prices, and worsening employment. This scenario would severely impact Mexico by drastically reducing demand for its exports, causing remittances to decline as migrant jobs are lost, and capital flight pushing the exchange rate downward. This would increase import costs, elevate inflation, and negatively affect domestic consumption, investment, and formal employment.
Moreover, both countries’ policy responses would be limited. The Federal Reserve cannot lower interest rates without exacerbating inflation, and Mexico’s government, with limited fiscal resources, would have a narrow margin for stimulus measures. President Claudia Sheinbaum has chosen to curb public spending, prioritizing budgetary discipline to avoid worsening the inherited deficit from Andrés Manuel López Obrador’s administration. This prudence ensures stability but restricts their capacity to react if external conditions worsen.
Trump’s Protectionist Policies and Their Consequences
Trump’s apparent strong, protectionist economic model is showing weaknesses, as evidenced by Q1 data. If his policies lead to stagflation, the consequences will extend beyond the US-Mexico border. Given Mexico’s high trade dependency and structural vulnerability, it will be among the first to feel the impact.
