Ricardo Pascoe Pierce
Generally, the markets agree that Mexico’s macroeconomic situation has deteriorated since the second quarter of 2024. While there are multiple internal and external reasons for this deterioration, the following stand out: the weakening of the country’s institutions and the uncertainty generated by the interaction with the Trump presidency.
The disappearance of the autonomous bodies of control, surveillance, and transparency has been seen as a regression to the era of a government with no obligation to be accountable for its actions. Additionally, and indeed most importantly, the disappearance of the judiciary as it was known and its replacement by an alternative allowing the government to exercise absolute control over its decisions. In general, the institutional restructuring guarantees that the hegemonic political party will be able to remain in power indefinitely by filling the substantive electoral bodies with people who are loyal to the regime. Consequently, democracy and the system of alternation of power as the basis of the political system are weakened.
These institutional changes weaken the rule of law in Mexico, creating legal uncertainty for companies risking their investments in a volatile country’s decision-making. The game’s rules are changed according to changing ideological positions, many of them with an anti-market spirit and at the service of corruption.
On the other hand, the “new” Trump is not what the world markets expected. The stock markets and the predominant industrial sectors, such as the automotive sector, expected behavior similar to Trump’s first term: an emphasis on tax cuts, sectoral deregulation, and economic growth. Even the discussion of tariffs would come later and be very nuanced in specific cases.
But this has not been the case. He has issued threats and the application of tariffs to the whole world and attacked his CUSMA/USMCA/T-MEC partners, Mexico and Canada. Even the fact that Trump does not rule out a possible economic recession has created a sense of uncertainty due to his constant changes in trade policy. Threats of tariffs come and go; they are announced and postponed. He wants to resolve the war in Ukraine and Gaza while at the same time threatening to annex Greenland and Canada, along with Panama. And, as the world knows, “he who grasps at too much slackens his grip”. But he can certainly create chaos where there was none.
His applied tariffs have a market value of almost 1.4 trillion dollars. That is why many countries apply reciprocal tariffs. Mexico has ignored the tariffs applied by Trump to our country, thinking that it is a good political strategy to contain the irascible Trump. However, it costs Mexico money to pay the tariffs imposed by Trump without getting anything in return. We are indulgent to the point of humility! Even if it is only “until April 2”, it has been said. We dance to Trump’s tune.
The result of this situation is that a decline in GDP is expected, which is already calculated at +0.6% for 2024. The most likely scenario for 2025 is a GDP in negative territory, around -0.5%. One possible effect will be lower inflation and interest rates, which can be considered positive because it will keep the national currency’s exchange rate with the dollar relatively stable. However, the essential economic scenario has strong recessionary tendencies, especially if the United States goes into recession. If that happens, the impact on Mexico will be catastrophic.
To face the economic situation with more promising prospects, Mexico needs to amend its weakened institutional framework, seriously considering the cancellation of the so-called “judicial reform”. But it is also urgent to improve the systems of access to financing for productive projects in the private sector and to radically change the objectives of public investment to develop the country’s productive infrastructure and stop financing public works that seriously deteriorate its fiscal framework, such as the Mayan Train, the Dos Bocas refinery, and the Mexicana airline.
For now, the markets consider that uncertainty will be the hallmark of Mexico’s economic outlook during 2025.
@rpascoep
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