Mexico’s economy is declining & faces mounting threats
by Macario Schettino.
In my first column for The Mexico Brief, six weeks ago, I wrote that Mexico was in a recession. Now that we are nearing the end of the year’s first half, the evidence is even stronger. Although an unusual event in February has led many to think otherwise, the truth is that we are already seeing a generalized downward trend.
Consumption contracted year-over-year for the fourth consecutive month in March, and the preliminary indicator suggests no meaningful change in April and May. On average, the decline has been -0.5% compared to the previous year, starting from last October when the current administration took office.
In investment, the situation is worse. The decline began in September, and the following seven months have all shown negative numbers, averaging a yearly contraction of -4.4%, also since October.
In overall economic activity, growth since October is flat, with three out of those six months showing contraction. The impact is now noticeable in employment, with monthly declines and virtually zero annual growth. It’s worth remembering that — since the year 2000 — whenever employment grows at a rate below 1% annually, a recession is a certainty.
Except for employment data, which we have up to May, the rest of the indicators end in March and therefore do not yet reflect the full impact of global uncertainty caused by Donald Trump — especially since the “Liberation Day” event on the afternoon of April 2. We don’t know much about what has happened since then, except in the case of remittances, which saw one of the steepest drops on record in April: -12% compared to April 2024.
On Mexico’s imminent risk
by Macario Schettino.
Last Sunday, elections were held in Mexico—very unusual elections that are virtually unheard of in any other country in the world. Judges, magistrates, and justices were elected in order to completely replace the Supreme Court, to create a new Judicial Discipline Tribunal, and to fill the federal and local electoral courts, which had been incomplete. Not only that—more than eight hundred circuit magistrates and judges were elected, for a total of 881 positions.
With this election, and the law that made it possible, the Judicial Branch in Mexico ceases to be autonomous and becomes subordinated to the Executive Branch, which also controls the Legislative Branch thanks to the qualified majorities it obtained illegally just days after last year’s presidential election. Put more simply, Mexico ceases to be a republic and becomes an authoritarian system. The new judges will take office in September.
This new distribution of power—or rather, concentration of power—is a major change from just a few years ago, when the USMCA was signed, and it actually contradicts that agreement. It adds to changes in energy policy, which are also incompatible, and I don't think it will make negotiations for a new deal with the United States and Canada any easier. Even more concerning, the risk for existing investments in Mexico has increased, as the mechanisms previously available for dispute resolution have disappeared.
Crony capitalism
by Macario Schettino.
In the 20th century, the Mexican economy - like the rest of Latin America - chose a policy known as Import Substitution Industrialization. The goal was to produce in Mexico what would be consumed domestically, and to achieve that, tariffs were imposed on imported goods. In theory, infant industries would be able to survive, become competitive, and tariffs could then be eliminated. The opposite happened: tariffs had to be increased because domestic industry never became competitive. Eventually, the economy was completely closed off and suffered its worst peacetime crisis in 1982.
In 1986, an attempt was made to reverse course. Mexico joined the GATT, implemented an anti-inflationary plan, renegotiated its external debt, and even signed a trade agreement with the United States and Canada. After a deep but brief crisis, the benefits of NAFTA became evident. In the final years of the 20th century, Mexico grew at rates it hadn’t seen in decades.
In 2001, China joined the WTO (GATT’s successor), and the dot-com recession hit the United States. This derailed the Mexican economy, which was unable to resume strong growth, instead remaining at an average annual rate of around 2%. During those years, many studies - by Mexican and foreign academics, agencies, and institutions - tried to identify the reasons why Mexico could not grow faster.
A risky combination
by Macario Schettino.
I greatly appreciate the invitation to contribute biweekly to Mexico Brief. Since this is my first piece, I’d like to dedicate it to reviewing the current state of Mexico’s economy. Virtually all of the data we have predates Donald Trump’s arrival at the White House, though some indicators are more recent and may already reflect part of the impact of the decisions he has made.
From 1980 to 2018, the Mexican economy grew at an average annual rate of 2.2%, despite the domestic and foreign crises experienced during those 38 years. However, beginning in 2018, there is a clear shift in trend. The cancellation of the construction of Mexico City’s new airport had an immediate effect on market confidence, which was reflected in a depreciation of the peso and a rise in interest rates. During 2019, that decision was compounded by the obstruction of the ongoing energy reform, and investment steadily declined throughout the year. Before COVID and the lockdown arrived, there was already a contraction—reaching -1% in the last quarter of 2019 and -2% in the first quarter of 2020, although the final days of that period can already be considered part of the pandemic’s impact.
The overlooked impact of Trump’s auto tariffs
by Luis Lozano.
Donald Trump is obsessed with imposing tariffs to vehicles made outside the United States, but I do not think he has a clear objective for it other than the protection of American jobs. Let’s assume that works. The issue here is if saving American manufacturing jobs will make American cars more appealing to the global markets. Put a different way: will reviving American automotive manufacturing guarantee that the US keeps up with technological changes being led by Asian brands? Unlikely…
The most important thing that the North American automotive business has experimented with in the last 40 years has been NAFTA. NAFTA created an environment of competitiveness that the US had lost with Lyndon B Johnson’s tariffs. Those tariffs disconnected the industry from other markets and needs, ironically hurting the competitiveness of the American brands. They resulted in the United States losing its ability to lead an industry which it invented for the world. It is impressive to see that the US government making the same mistakes today.
