'Recession To Hit' Mexico, Says Analyst As GDP Contracts, Inflation Eases, Banxico Faces Pressure

Mexico's economy is slipping into recession, and according to JPMorgan analyst Steven Palacio, it's no longer a question of if, but how deep.

"We now think a recession is unavoidable" due to weak economic momentum, declining private consumption, and sluggish manufacturing, Palacio warned.

The bank now expects first-quarter gross domestic product (GDP) to shrink by 1.5% quarter-over-quarter on an annualized basis. That’s a sharp revision from its previous forecast of 0.5% growth. This follows a 2.5% GDP decline in the fourth quarter, putting Mexico on track for a full-year contraction of 0.2%.

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A Shrinking Economy, Weak Consumer Demand

JPMorgan’s latest data shows Mexico’s GDP proxy was down 0.2% in January, following a 1.1% month-over-month drop in December.

"Momentum was already weak coming into the new year," Palacio noted, adding that January's GDP level is tracking a 3.1% annualized contraction in the first quarter. Services, which had already declined 0.8% in December, remained flat in January, further confirming a deteriorating growth outlook.

Palacio pointed out that Mexico's economic drivers have shifted significantly.

"For many quarters domestic demand single-handedly drove growth, largely driven by private consumption, but also by investment,” he added.

Investment was the first to falter, followed by private consumption, which is now feeling the strain of slowing job creation. External demand, particularly in manufacturing, has failed to offset these weaknesses, as production has remained inconsistent.

Inflation Easing, Rate Cuts Incoming

While economic growth deteriorates, inflation is cooling faster than expected. Core inflation has dropped to 3.56% year-over-year, with core services inflation finally slipping below 5%. Palacio noted, "The downward pull from cyclical weakness in the economy is becoming more noticeable in non-tradable prices." He also highlighted a decline in housing inflation, with non-tourism services now following the same trend.

Given these developments, JPMorgan sees an increasingly dovish stance from the Bank of Mexico (Banxico). Palacio believes the case for "back-to-back 50 basis point rate cuts at least in the next couple of meetings is strong," with risks skewed toward even deeper easing. The bank continues to project a year-end interest rate of 7.5% but sees further downside potential.

Investor Implications: ETFs, Stocks To Watch

With Mexico's economic downturn accelerating and inflation cooling, investors should brace for further volatility in the Mexican peso and local equities. The iShares MSCI Mexico ETF , which tracks major Mexican stocks, could face downward pressure if GDP contracts as sharply as JPMorgan predicts.

Key Mexican companies with exposure to domestic demand, such as Grupo Bimbo SAB de CV (GRBMF) and Walmart Inc (WMT)‘s Mexican entity, Walmart (WMT) de M?xico y Centroam?rica, could also be impacted as consumer spending weakens.

Palacio's note follows a report from the Organization for Economic Cooperation and Development, which blames the global trade war for hurting Mexico’s economy.

With Mexico's growth story shifting from expansion to contraction, investors will need to adjust their strategies accordingly.

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