Mexico's growth forecasts slashed amid US trade tensions

The uncertainty surrounding trade policies due to the potential negative effects of US president-elect Donald Trump’s protectionist stance will impact the economic growth of most emerging markets, and Mexico is expected to be among the hardest hit.

Trump, who will take office for the second time on January 20, threatened again this week to impose 25% tariffs on all goods entering the US through what he called its "ridiculous open borders," targeting Mexico and Canada, its partners in the USMCA agreement.

While S&P Global Ratings clarified that the magnitude of the impact will depend on the specifics of these policies, which will become clearer in the coming months, both S&P and Moody’s Analytics made downward revisions to their GDP growth forecasts for Latin America's second-largest economy for 2025.

S&P cut its real GDP growth forecast for emerging markets, excluding China, by 10 basis points for both 2025 and 2026, to 4.3% and 4.4%, respectively, and trimmed its projection for Mexico's economic growth in 2025 to 1.2%, down from the 1.5% it estimated in September.

In a report, Moody’s cut its Mexican growth estimate to 0.6%, down from the previous 1.3%.

In a post on this social media platform Truth Social, Trump argued that the trade tariffs are aimed at curbing illegal immigration and referred to a caravan of thousands of migrants reportedly heading to the US from Mexico, although Mexican President Claudia Sheinbaum stated on Wednesday that it had already been disbanded.

Trump wrote: “This tariff will remain in effect until such time as drugs, particularly fentanyl, and all illegal aliens stop this invasion of our country!”

He also threatened to impose an additional 10% tariff on China’s existing trade duties.

The arguments

Regarding Mexico’s downward growth revision, S&P argued that several sources of uncertainty support its view that fixed investment will be weaker than previously anticipated.

“First, under US president-elect Trump, the threat of changes to the USMCA, scheduled for review in mid-2026, could delay investment decisions. Our baseline scenario assumes no major changes to the USMCA, neither before nor during the review process,” the agency said.

"Second, US immigration policy toward Mexico is also likely to be contentious under the incoming US administration, which could influence proposed changes in trade policy and weaken investment as well as remittances."

S&P also highlighted that recent reforms in Mexico, "such as changes to the judicial system," some of which require secondary legislation, could delay investment decisions until there is greater clarity.

Moody’s Analytics, meanwhile, warned that “the Mexican economy will be one of those most exposed to the negative effects of President Trump’s economic policies. This is not only because Mexico is a direct target of Trump but also due to its strong trade and investment ties with the US economy.”

According to data from the Observatory of Economic Complexity (OEC World), Mexico is the largest trading partner of the US and is highly integrated into the region’s value chains, especially in electronics and the automotive sector, with total trade of US$335bn between January and August.

“Mexico will be affected in both its economy and its financial market. The US policies that will cause the most significant adverse effects on Mexico are those related to tariffs and immigration,” said Moody’s Analytics analysts Alfredo Coutiño and Jesse Rogers.

They added that these adverse effects will slow Mexico’s economic performance, particularly over the next two years. “The economy will be impacted through trade, investment, and remittance channels, while the financial sector will face risk aversion and volatility.”

“In the real sector, the Mexican economy will feel the impact of the US economic slowdown through reduced demand for Mexican goods. A second impact will come from tariffs on Mexican exports, and a third will result from the negative effects on foreign direct investment as some US companies reconsider or even cancel their relocation plans in Mexico,” Moody’s said.

Remittances will also be affected by immigration policy due to the deportation of undocumented Mexican workers, with the drop in these flows – which have represented nearly 4% of Mexico’s economy over the past three years – contributing to the economic slowdown, as particularly lower-income families who have a higher propensity to consume feel the brunt of the impact.

The Mexican government projects that the domestic economy will grow between 2% and 3% in 2025, as outlined in the revenue portion of its budget proposal, which has been approved by the chamber of deputies.

Sovereign rating

Not only has Mexico’s GDP growth outlook been hit by the uncertainty and trade tensions with the US following Trump’s election as its next president, but its sovereign debt rating has also been affected.

Following Moody’s, HR Ratings also downgraded Mexico’s sovereign debt outlook to negative from stable, maintaining it at 'BBB+ (G)'. The agency justified the change based on its deteriorating economic growth projections for this year and next, as well as a slower-than-expected reduction in the fiscal deficit for 2025.

HR Ratings now expects Mexico’s economic growth to reach 1.4% in 2024 and 1.1% in 2025, down from its April projections of 2.5% and 2.0%, respectively.

“The expected US administration change in January 2025 could lead to a deterioration in trade relations with Mexico’s primary trading partner, further negatively affecting its economic performance,” HR Ratings said.

Mexico’s economy minister Marcelo Ebrard noted on Wednesday that North American trade accounts for nearly a third of global trade. He warned that if Trump imposes a 25% tariff on Mexico, it will be “a shot in the foot” for the US economy, affecting about 400,000 jobs.

“The first impact of a tariff, which is a tax, will be felt by the main US companies in Mexico, particularly in the automotive industry – the most affected sector because it is the largest exporter. What he is essentially saying is, let’s impose a 25% tax on the most important American companies in the world because they produce in Mexico and export to the US,” Ebrard stated during a presidential press conference.