“The damage is already done, maybe there's a slight recovery in the second quarter, but this quarter is lost,” said Marco Oviedo, senior strategist for Latin America at XP Investments.

During the final months of 2024, Mexico had its first quarterly GDP slump since the pandemic. A first-quarter contraction would mark a technical recession, defined as two straight quarters of negative growth.

Trump's tariff threats pile pain on Mexico after a devastating drought last year. Investors were also worried about a controversial judicial overhaul and unchecked congressional power of the ruling Morena party.

The economy is a headache for Mexico's President Claudia Sheinbaum, who enjoys sky-high approval ratings but has had to aggressively rein in spending after inheriting the country's highest budget deficit since the 1980s.

A technical recession would likely reignite pressure for a fiscal reform. Sheinbaum has said Mexico does not need significant reform, even as she wrestles with how to maintain current levels of welfare while the economy sputters.

Last week, Trump imposed 25% tariffs on all imports from Mexico and Canada, then offered a month-long reprieve on goods that comply with the USMCA, a regional trade agreement.

Sheinbaum has said she expects exports under the USMCA to remain exempt from tariffs. Around half of Mexican exports to the U.S. are USMCA-compliant and the government aims to boost that to between 85% and 90%, according to Economy Minister Marcelo Ebrard.

Yet the outlook on tariffs remained unclear. Trump's frequent shifts on tariffs have exasperated negotiating teams in Mexico and Canada, leaving businesses in limbo.

Economists that participate in Reuters surveys have warned of an increased risk of recession for the U.S., Mexico and Canada given the uncertain future of USMCA.

Mexico’s GDP contracted at a seasonally adjusted 0.6% rate in the fourth quarter and full-year growth was 1.2%, reflecting a worsening economic picture even before Trump's arrival.

Sheinbaum has insisted Mexico’s economy is strong and recently launched a plan aiming to boost investment and replace imports with increased local manufacturing.

Despite the worsening numbers, some say it is too early to draw firm conclusions.

Deputy governor of Mexico's central bank Jonathan Heath told Reuters "it is very premature to speak of a recession" even if there is a slight contraction in the first quarter, though "we do have to admit we are going through a bad streak of stagnation caused in large part by the prevailing uncertainty."

He said he expected "a decline in construction and in some parts of manufacturing, but it is not at all clear it will encompass the majority of the economy."

In February, Mexico's central bank halved its forecast for 2025 GDP growth to 0.6% from a previous 1.2%, although the Finance Ministry has maintained its forecast of 2% to 3% growth.

Gross fixed investment fell by a seasonally adjusted 2.6% in December, while private consumption dropped by 1.1%.

Last month, Fitch Ratings said a 25% across-the-board tariff could push Mexico into a recession this year and that its “BBB-” rating would face risks if economic conditions hurt public finances. Sheinbaum could consider a fiscal reform to raise revenue and increase public spending to counter a potential recession. But that would likely grow the deficit, which she has sought to cut.

“We have to recognize the rules have changed," said Ernesto Revilla, Citi's chief economist for Latin America. "There is a new level of uncertainty in the North American region that, regardless of whether the tariffs don’t happen, will cause permanent damage because it's going to scare off investment.”