Bank of America has revised down its forecast for Mexico's economic expansion in 2026, cutting its GDP projection to 0.8% from a prior call of 1.3% after an unexpectedly large contraction in the first quarter.
Mexico's flash GDP data showed a quarter-over-quarter decline of 3.16% on a seasonally adjusted annualized rate (SAAR) basis in Q1 2026, larger than the anticipated 2.38% drop. This downturn followed a 3.50% expansion in the fourth quarter of 2025.
The pullback in Q1 was broad-based. Agriculture fell 5.48% quarter-on-quarter, industry contracted 4.33%, and services decreased 2.38% in the same period. On an annual basis, GDP inched up 0.10% year-over-year, down from 1.79% in Q4 2025.
The industrial sector's weakness was linked to pressures on the Mexican auto industry, which faced higher tariffs relative to competing countries. The services sector also softened, in part because of increased violence since February that weighed on tourism, though services remained more resilient when measured on a year-over-year basis.
Bank of America described the current environment as stagflationary in nature, citing external headwinds such as uncertainty stemming from the USMCA review and the conflict involving Iran. The bank noted that potential upside risks to its forecast include a government infrastructure plan and a possible boost related to the FIFA World Cup.
The bank kept its 2027 GDP outlook unchanged at 1.5%, while highlighting structural constraints tied to weak productivity that may keep growth modest over the medium term.
On monetary policy, Bank of America now anticipates that Mexico's central bank, Banxico, will reduce its policy rate by 25 basis points at the May 7 meeting, lowering the rate to 6.50%. That expected timing represents an acceleration from the bank's earlier view that a cut would occur in June. The bank projects Banxico will maintain the 6.50% policy rate through the end of 2026.
Implications of the downgrade touch several segments of the economy. Industry - notably the auto sector - and services such as tourism were explicitly cited as contributors to the quarterly contraction, while agriculture also registered a marked decline. The downgrade, and the shifted timing of Banxico's easing, reflect the bank's assessment of near-term pressures and limited near-term upside from policy or external events.