Key Points
The Mexico economy started 2026 with its worst monthly performance in over a year, as industrial weakness that has been building for years finally spread into services and agriculture in January. Statistics agency INEGI reported the economic activity index fell 0.9% from December, The Rio Times, the Latin American financial news outlet, reports.
Manufacturing Crisis Deepens in the Mexico Economy
The industrial sector, which drives roughly a fifth of GDP, contracted 1.1% month-over-month. Manufacturing — the backbone of Mexico’s export model and the sector most exposed to U.S. trade policy — fell 1.7% year-over-year, with auto production and textiles leading the decline. Construction dropped 1.1%, while energy generation and water supply fell 1.9%.
The damage goes beyond output. INEGI data shows manufacturing employment has contracted for 35 consecutive months, the longest streak outside a recession.
Auto-sector jobs fell 6.2% annually, and textile employment dropped nearly 4%. Only computer manufacturing posted gains, benefiting from low U.S. tariffs on tech exports.
Tariffs and the USMCA Overhang
The industrial decline is inseparable from U.S. trade policy. The 50% steel tariffs imposed under Section 232 have already cut Mexico’s steel exports to the United States by 20%, while Mexican steel plants now operate below 60% capacity. Banco Base analyst Gabriela Siller attributes the manufacturing slump to rising labor costs, investment caution, and policy uncertainty under the Trump tariff regime.
The formal USMCA review begins in July 2026, and bilateral discussions on rules of origin and supply chain security started in Washington on March 16. Until the review produces clarity, companies are pausing investment decisions — a dynamic that Monex analysts say explains the weak start to the year.
Banxico has continued cutting its benchmark rate to stimulate growth, but the pace has been cautious to avoid destabilizing the peso. Core inflation — which strips out volatile food and energy prices — ticked higher at the end of 2025, limiting the central bank’s room to maneuver. The monetary easing has not yet translated into a rebound in business investment or hiring.
Services Cannot Compensate Forever
The services sector, which accounts for nearly two-thirds of the economy, grew just 0.9% annually in January. While tourism and domestic consumption have cushioned the industrial decline, services contracted 0.6% from December — a sign that the buffer is weakening.
Agricultural activity, typically volatile, plunged 3.7% month-over-month but posted a 2.4% annual gain. The annualized IGAE growth of just 0.5% in January confirms a trajectory of progressive deceleration in the Mexico economy — from 6.1% in 2021, to 3.2% in 2023, to 1.5% in 2024, to 0.6% last year.
Wholesale trade contracted 0.9% from December and retail fell 0.4%, suggesting that the consumption engine that kept the economy afloat through 2025 is also losing momentum. The January reading came in worse than the preliminary estimate of -0.2%, catching several analysts off guard.
Monex projects 1.49% growth for full-year 2026, while the central bank forecasts 1.6%. Both assume tariff conditions do not worsen significantly.
With the USMCA review, elevated U.S. interest rates, and the Iran-driven oil shock adding new headwinds, the risks to even those modest targets are firmly tilted to the downside. Mexico avoided a technical recession in 2025 by the narrowest of margins, and January’s data suggests the margin is not getting wider.