Economics: Mexico's August data shows a rebound in some sectors but it won't translate into lasting growth
Mexico's economic indicators released in August showed a partial rebound: private consumption grew 2.6% YoY in May and gross fixed investment rose 2.4%, following twenty consecutive months of decline, while June's IGAE advanced 1.7% annually, and revised second-quarter GDP came in with 1.9% annual growth. However, this strength was concentrated in volatile sectors or ones recovering from very low levels — mining, agriculture, residential construction, wholesale trade, and health services — making it unsustainable: industry posted weak growth in June (0.8%) and remains stagnant for the year, manufacturing fell -1.2% YoY, hit by tariff uncertainty in the automotive and steel sectors, and services slowed amid weak spending on restaurants, hotels, and retail trade. Given this sectoral backdrop, we project a slowdown in the second half of the year, with full-year growth of 1.3% in 2026 and 1.4% in 2027 — figures that would leave per capita GDP essentially stagnant and below the 2% historical average recorded between 2000 and 2018.
On the inflation front, Banxico held its rate at 6.50% at its August 6 meeting, citing the decline in headline inflation from 3.55% to 3.1% between June and July, although that decline was driven mainly by a sharp drop in livestock prices that will reverse in the coming months. Inflation for the first half of August rose to 3.26%, with non-core inflation climbing to 0.96% on higher fruit, vegetable, and public utility prices, while core inflation remained essentially flat at 3.93%. Given the external pressures from the oil conflict and a possible Fed rate hike, core inflation in Mexico is expected to remain above 4% by year-end, forcing Banxico to hold its rate at 6.5%.
In public finances, the first half of the year revealed a fragility the government has sought to downplay. The fiscal deficit barely narrowed, the primary balance collapsed, tax revenue remains frozen — artificially propped up by VAT and tariff collection — and the adjustment fell on public investment rather than current spending. Pemex remains in an operational stagnation disguised as stabilization, with persistent financial losses and unrecognized liabilities, while the CFE faces stagnant revenue and growing labor and pension obligations.
Finally, our analysis of macroeconomic scenarios for 2026-2030 assigns the highest probability (50%) to an inertial, low-growth scenario (0.5%-1.3%) stemming from the erosion of the rule of law and fiscal fragility; 30% to Mexico's accepting U.S. demands to hand over politicians linked to organized crime, resulting in moderate growth (1.2%-1.8%); 15% to a catastrophic scenario of political radicalization with GDP contraction; and only 5% to a scenario of major structural adjustments that would allow for growth of 2%-3%. Taken together, there is a 65% probability that the current stagnation will either persist or worsen in the coming years.
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