1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 93
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Investment weakness is a major headwind for Mexican GDP
60%
y/y % change, 3mma
40%
20%
0%
-20%
-40%
2020
2021
Private construction
2022
2023
Private machinery
2024
2025
Public construction
Source: INEGI, Scotia Wealth Management.
Uncertainty is in high supply for 2026. At home, Banxico’s rate path will likely clash with new
sales taxes, adding to an already-precarious inflation trajectory, and Mexico’s government will
likely continue to struggle to rein in public finances and possibly consider tax hikes. Planned
tariffs on imports from key trading partners in Asia would also build inflationary pressures and
risk tit-for-tat retaliation that further dampens expectations for Mexico’s manufacturing sector.
Also on the international stage, the review of the United States-Mexico-Canada Agreement
(USMCA) will likely result in higher regional content requirements, with posturing ahead of, and
during, the negotiations keeping businesses and markets on edge. Meanwhile, labour markets
and investment momentum remains downbeat, and likely to remain so over the near term to
keep domestic demand soft.
Markets and economists (us included) are widely split on their expectations for Banxico rate
cuts in 2026 (Fig x.). We believe that policymakers will deliver three more 25 bps cuts between
now and end-2026: one in December 2025, followed by two in Q1/26, bringing the rate to a
6.50% level, where it will likely remain until at least mid-2027 (after which, further easing may be
appropriate). In contrast, markets think it is likely that Banxico will cut in December 2025 but
then assign only about a one-in-two chance of more cuts during the cycle. To boot, traders
think that Banxico could start hiking as soon as Q3/26.
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