Mexico central bank slashes growth forecasts citing significant weakness

By Brendan O'Boyle

MEXICO CITY, May 27 (Reuters) - The Bank of Mexico slashed its growth forecasts for Mexico's economy this year and next year, citing sluggish domestic activity and uncertainty related to U.S. trade policy, according to its quarterly report published on Wednesday.

"The Mexican economy is undergoing a period of significant weakness and faces challenges," the report said.

Banxico, as the central bank is known, estimated that Mexico's gross domestic product will grow just 0.1% this year, below its February estimate of 0.6%.

The bank also cut its 2026 GDP growth forecast in half, forecasting 0.9% growth compared to its February estimate of 1.8%.

Domestic activity is expected to be "sluggish" in coming months, the bank said, with domestic weakness exacerbated by "significant challenges stemming from the changes in U.S. trade policy."

Despite the challenges facing Latin America's second-largest economy, some of the governors ruled out an imminent recession.

"We are foreseeing a period of weakness for economic activity, but not a recession," Governor Victoria Rodriguez said during a presentation of Wednesday's report.

"The economy is stagnant, and it appears it could remain stagnant for a while ... but we're not in a recession right now," said Deputy Governor Jonathan Heath.

Banxico noted that Mexican exports have remained resilient in the face of U.S. tariffs, partly due to the preferential treatment under Mexico's trilateral trade deal with the U.S. and Canada.

However, the bank flagged uncertainty about the full impact of Washington's tariffs, noting it expects tariffs to harm the U.S. economy, which would lead to lower external demand for Mexican goods.

"Uncertainty alone hinders investment decisions and negatively affects the business environment," the report noted.

Mexico's economy grew 0.2% in the first quarter from the previous quarter, allowing it to narrowly avoid a technical recession. Still, analysts have underscored the economy's underlying weakness, especially in manufacturing and services.

Banxico cited the economy's weakness as a factor when it cut its benchmark interest rate earlier this month by 50 basis points to 8.5%. It was the third straight cut of that magnitude, and the bank said in its report that it expects the current inflationary environment will allow still further cuts.

Inflation accelerated in early May to land outside the bank's target range, a trend that Heath described as concerning.
Even so, the bank maintained prior estimates that headline inflation will average 3.3% in the fourth quarter before converging to its 3.0% target in the third quarter of 2026.

The bank projected the core inflation index, which strips out volatile products, will rise higher than previously anticipated until the first quarter of 2026. It projected an average of 3.4% in the fourth quarter of this year, a percentage point higher than its prior forecast.