Mexico's Q3 GDP Contracts 0.3%, Weighing on Growth Outlook and Spurring Rate-Cut Bets

Mexico's Economy in Q3 2025: Contraction and Recession Fears

Mexico's economy contracted in the third quarter of 2025, raising concerns over a potential recession as GDP fell 0.3% on a seasonally adjusted quarter-on-quarter basis according to data. This followed a 0.6% expansion in the previous quarter and aligns with market expectations. The contraction is the first in several quarters and marks a sharp slowdown in economic momentum.

The services and industrial sectors underperformed in Q3, with the services sector growing at just 0.1% compared to 0.8% in the prior quarter. Meanwhile, the industrial sector saw a contraction of 1.5%, worsening from a 0.7% expansion in Q2. In contrast, the primary sector showed improvement, growing 3.2% in the third quarter versus a 2.4% decline in the second.

On an annual basis, Mexico's economy shrank 0.2% in the third quarter, down from a flat reading in the prior quarter according to official data. The data has heightened fears of a recession and prompted analysts to reassess the country's economic outlook.

Weak Economic Activity Paves the Way for Rate Cuts

Mexico's economic weakness has influenced monetary policy decisions. The central bank, Banxico, lowered its key interest rate by 25 basis points to 7.25% on November 6, signaling potential for further cuts in the near term. The decision was driven by expectations that the sluggish growth would continue to suppress inflationary pressures, although core inflation remains stubbornly above the 3% target range.

Banxico's minutes revealed that most board members anticipated economic weakness to persist, which would help bring inflation down in the coming months. However, the bank also acknowledged the persistence of services inflation and a cautious outlook on the path to returning to the target range.

Recession Fears and Domestic Sector Outlook

Analysts from Itaú Unibanco noted that the slowdown in Q3 was expected, given a very strong performance in Q2. The bank projected Mexico's GDP to grow at a statistical carry-over of 0.6% for 2025. Looking ahead, the outlook for domestically driven sectors remains mixed. A slowdown in local services and a contraction in investment are expected, but public projects such as railway construction and road maintenance may provide some support.

Mexico's economy faces additional headwinds from U.S. trade policy. Tariffs on exports to the United States, its largest trading partner, have contributed to economic drag. Banxico's data also showed that these tariffs are having a measurable impact on growth, according to the central bank's projections.

Political and Trade Uncertainties Add to Economic Pressure

The U.S.-Mexico relationship remains tense as U.S. President Donald Trump continues to pressure Mexico to take stronger measures against drug trafficking. President Claudia Sheinbaum has firmly rejected any military intervention from the U.S., citing historical concerns and stating that Mexico would not grant permission for foreign troops. This stance adds an element of uncertainty to the bilateral relationship and could affect trade and investment flows in the coming months.

In another trade-related development, China's rare-earth exports have slowed amid ongoing negotiations with the U.S. October's shipments of rare-earth materials, used in high-tech manufacturing and defense applications, fell to their lowest level since June. Although the decline is modest on a yearly basis, it signals potential volatility in global supply chains as trade dynamics evolve.

Implications for Markets and Investors

The combination of domestic economic weakness and international trade uncertainty has led to a more cautious tone from investors. Mexico's financial markets remain sensitive to both internal policy shifts and external trade developments. The potential for further rate cuts by Banxico may offer short-term relief, but the central bank's minutes indicate a more measured path forward as it monitors the evolving inflation outlook.

Investors are also watching how the U.S. Federal Reserve's monetary policy will interact with Mexico's. With the Fed signaling fewer rate cuts, the flexibility for Banxico to act may become more constrained.

As Mexico's economy enters uncharted territory, the focus will remain on domestic reforms, public infrastructure investment, and the resilience of key sectors. The coming months will be crucial in determining whether the country can navigate its current challenges and avoid a full-blown recession.