Our economic outlook for Mexico

We expect the Mexican economic outlook to improve considerably in 2027 on the back of a strong U.S. economy led by AI-related investment and productivity, despite recent lackluster quarters. Conflict in the Middle East has kept commodity prices elevated and the near-term economic outlook uncertain. Mexico’s exposure to the conflict is mainly indirect, operating through higher global energy costs—particularly refined petroleum products and natural gas—rather than through direct supply links to the region.

Demand from the U.S. should increasingly help offset lackluster domestic performance from the first half of the year. Recent data have provided mixed signals, with industrial production softening and retail sales remaining resilient. The labor market has been a bright spot, with the unemployment rate surprising to the downside, which has led us to revise our 2026 unemployment forecast lower. Over time, Mexico should benefit from stronger U.S. growth, which we expect to reach 3% in 2027, as AI-related investment supports demand for advanced-technology goods and manufacturing exports.

Additionally, the Mexican administration’s economic strategy, “Plan México,” could further support investment through streamlined approvals, regulatory simplification, and expanded energy infrastructure. We expect the midyear review of the United States-Mexico-Canada Agreement to continue to influence sentiment, with negotiations likely extending beyond the July 1 deadline and generating some volatility.

While inflationary pressures remain uneven, we continue to anticipate a gradual decline in inflation. Headline inflation has moved higher relative to the beginning of the year, driven largely by noncore components. Still, contained real wage growth, stable long-run inflation expectations, and the past appreciation of the peso should help push inflation lower over time, although higher energy prices remain an upside risk.

The Bank of Mexico lowered its policy rate by 25 basis points to 6.5% in May, in a split decision. The cut was justified partly by weak economic activity, which has widened slack and limited demand-side pressures, alongside a relatively strong peso. However, inflation is declining only gradually, with persistent services inflation and risks still skewed to the upside. In this context, we expect the easing cycle to be over, with rates held at current levels as inflation converges to target.