Mexico's economy unexpectedly shrank more than anticipated in the fourth quarter of 2021, recording its first quarter-on-quarter contraction in over three years, according to preliminary data from the national statistics agency INEGI. These results come at a crucial time for Mexico as it prepares for potential U.S. import tariffs that could exacerbate existing economic challenges, including tight monetary policies. The country is also awaiting a significant interest rate decision from the central bank next week.
INEGI reported that Latin America's second-largest economy declined by 0.6% in the final quarter of the year compared to the previous three-month period, falling into negative territory for the first time since Q3 2021. This figure was below the 0.2% decline projected in a Reuters poll of economists. The primary sector, encompassing farming, fishing, and mining, experienced an 8.9% quarter-on-quarter decrease, while manufacturing activities were down by 1.2%.
Economist Andres Abadia from Pantheon Macroeconomics described the report as "terrible," highlighting the broader narrative of slowing growth due to tightening financial conditions and less favorable external factors. Year-on-year, Mexico's GDP increased by 0.6% in the October-December period, marking the slowest pace since Q1 2021 and falling short of the 1.2% growth expected by analysts.
With the specter of potential U.S. tariffs looming over Mexico's economy and its significant trading relationship with the United States, markets are apprehensively monitoring the situation. The recent GDP data could prompt the Bank of Mexico to accelerate its monetary easing in the upcoming week, contingent upon the avoidance of U.S. tariffs, according to economist William Jackson from Capital Economics.
In 2021, Mexico's GDP saw a real growth of 1.5% for the full year, with seasonally adjusted growth at 1.3%, as reported by INEGI. The central bank had reduced its benchmark interest rate by 25 basis points to 10% in December, hinting at possible larger cuts in response to progress on inflation. Jackson noted that weak GDP performance has historically influenced rate cuts by Banxico, with a 50-basis-point reduction appearing probable provided that U.S. import tariffs do not materialize in the near future.