Recession in Mexico likely if Trump tariffs bite, analysts say

Trucks wait in a queue for border customs control to cross into the U.S., at the Zaragoza-Ysleta border crossing bridge in Ciudad Juarez
FILE PHOTO: Trucks wait in a queue for border customs control to cross into the U.S., at the Zaragoza-Ysleta border crossing bridge in Ciudad Juarez, Mexico June 1, 2019. REUTERS/Jose Luis Gonzalez

June 5, 2019

By Noe Torres

MEXICO CITY (Reuters) – The Mexican economy will likely slip into recession this year if U.S. President Donald Trump follows through on a threat to impose tariffs on Mexican exports to the United States, a Reuters poll of market analysts showed on Wednesday.

Last week, Trump vowed to slap escalating tariffs of 5% from June 10 on all goods from Mexico if the latter does not stem a tide of migrants from Central America crossing the U.S. border.

Reuters polled 17 economists and financial market analysts on whether Latin America’s no. 2 economy faced recession, having already contracted in the first three months of this year.

A recession is generally defined as two consecutive quarters of economic contraction.

Ten of the respondents said a recession was “likely” if Trump carried out his threat to apply tariffs, which could rise as high as 25% by October if no agreement is reached.

Four of the analysts saw recession as “very likely.” The remaining three said they believed the prospect was “unlikely.”

As a proportion of Mexico’s total U.S. exports in 2018 – $347 billion, according to U.S. data – a 5% tariff implies costs of roughly $1 billion between June 10 and 30.

If the tariffs rise further, that cost, too, would surge.

Mexican officials have been scrambling to reach an agreement with the Trump administration since the U.S. president unveiled his threat on Twitter last Thursday.

A delegation led by Mexican Foreign Minister Marcelo Ebrard is in Washington to broker a deal. Ebrard is due to hold talks with U.S. officials led by Vice President Mike Pence and Secretary of State Mike Pompeo later on Wednesday.

Mexico’s economy shrank by 0.2% quarter-on-quarter in the January-March period, dealing a blow to President Andres Manuel Lopez Obrador, who says the economy can grow by 2% this year.

Irrespective of whether Trump imposes tariffs, 15 of the 17 analysts polled said the Mexican central bank would keep its benchmark lending rate unchanged at 8.25% when it makes its next monetary policy decision at the end of June.

The other two analysts predicted the bank would raise its benchmark interest rate if the tariffs were introduced.

A majority of the analysts said the bank could opt to intervene on currency markets to head off the risk of a disorderly depreciation of the peso in the event of tariffs.

The peso has fallen by around 2.5% against the U.S. dollar since Trump’s tariff threat last week.

(Polling by Noe Torres in Mexico City, Gabriel Burin in Buenos Aires, Sharay Angulo in Mexico City; Editing by Dave Graham and Bernadette Baum)

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