Economic growth 2025: Who knows what the future holds? Let's try it with science and data

Recently, the Bank of Mexico adjusted its economic growth forecast for 2025. Yes: it went from an optimistic 1.2% to a timid 0.6%. What happened there? Did the house of cards fall? In its publication of the “ Quarterly Report October-December 2024 ”, published on February 19, 2025, they mention the adjustment of the change in forecast due to the slowdown of the global economy , as well as internal, economic uncertainty and pressure on inflation . In this publication, they do not make public the coefficients that allow us to know the impact that would be had on the growth forecast due to a movement of the variables that they consider relevant. It is not to overshadow the Bank of Mexico, but at least we can say that we have no secrets and we take on the task of making our own model.

To understand what will happen to economic growth in 2025, we put together an econometric model . And it’s not as boring as it sounds. It’s basically a fancy way of saying that we tried to see how different things in the economy are related. And to make it more interesting, we excluded some things (like the interest rate and the exchange rate) because we already know that they influence each other indirectly, but we didn’t want to complicate our lives. It’s like when you want to make a pizza, but you decide not to put pineapple on it because you know that it’s just going to make everyone fight.

The first star in our model is private consumption: This is the great engine of any economy. It is like the fuel in the car. If people buy things, companies produce more and the economy turns around. According to the famous economist John Maynard Keynes , consumption is strongly related to disposable income. Keynes argued in his “General Theory of Employment, Interest and Money” (1936) that household spending increases as they have more money available and that this is essential to boost the economy. In Mexico, where private consumption represents more than 60% of the Gross Domestic Product ( GDP ), this is a key factor. If household consumption falls, the economy will also fall. Not to alarm you, but if in Mexico households do not spend, companies do not sell , jobs do not grow and the country does not advance.

Investment is the next piece of the puzzle. Here, we are talking about capital accumulation , which is one of the fundamental pillars of long-term economic growth, according to the Solow growth model (1956). This model explains that economic growth depends on three factors: capital accumulation (investment), technological progress, and the growth of the labor force. In the case of Mexico, investment has traditionally been volatile , influenced by both internal factors (such as business confidence and the political climate) and external factors (the relationship with the United States and the global situation). In times of uncertainty, such as those we have experienced in recent years, entrepreneurs tend to slow down their investment projects . And of course, less investment means less employment, less infrastructure, and less progress.

Net exports are essential in an open economy like Mexico's. Following the logic of David Ricardo's theory of comparative advantage (1817), countries should specialize in producing what they do best and trade with other countries to obtain what they do not produce efficiently. In Mexico, exports represent an important part of GDP, especially sales to the United States, its main trading partner. If exports increase, the country benefits; if they decrease, the economy is affected. The relationship with the US is crucial, since changes in trade policy or tariffs could significantly impact Mexico. For example, an increase in tariffs, as is the main topic of negotiation between the two countries at present, could make Mexican products more expensive in the US market and reduce exports.

What about inflation ? Well, inflation is that noisy concept that creeps into every corner of the economy. On a theoretical level, the Phillips curve tells us that there is an inverse relationship between inflation and unemployment : when inflation rises, unemployment tends to fall, but that is not always the case. In the case of Mexico, controlled inflation is crucial, because if prices rise too much, consumers' purchasing power is affected and that reduces consumption, which is bad for growth. In other words, if prices rise and rise uncontrollably, your morning coffee could cost you twice as much and nobody wants that. In addition, inflation hurts businesses, as it increases production costs and can lead to an economic slowdown.

Finally, government spending is the last important variable. According to Kaynesian theory, public spending is critical in times of economic downturn. The government can intervene and stimulate aggregate demand through investments in infrastructure , subsidies , or support programs. In a country like Mexico, with high levels of labor informality and an economy that depends heavily on global cycles, the government has an essential countercyclical role. In difficult times, if the government reduces its spending , the economy trembles; if it spends more, it can revive the economy, at least temporarily.

After doing all the calculations without racking our brains too much, the following results are presented:

Pibt=12.23+0.85 CP+0.67 Inv+0.45 ExpN-0.23 Inf+0.38 G+u

CP= Private consumption

Inv=Investment

ExpN= Net exports

Inf = Inflation

G= Government spending

What this tells us is that private consumption and investment are the macroeconomic variables with the greatest influence on the Mexican economy . If those two move, the economy moves as well. On the other hand, inflation, with its negative coefficient, is not the most welcome guest at the party, so the main task of the Bank of Mexico is to take care of it through its interest rate and other pertinent ways to control it.

With all these numbers, we venture to give our prediction of two possible scenarios for 2025:

Optimistic scenario : Here, consumption and investment are on a moderate path, inflation is kept under control, negotiations with Trump are favorable and tariffs are not being implemented on all products and the government is spending enough to help the economy . The projected growth would be 0.92%. It is not the best outlook, but at least the economy is not collapsing. It is like having a cloudy day, but without rain.

Pessimistic scenario : If negotiations with Trump become difficult and tariffs are applied and exports fall, investment is reduced and the government does little to help (it reduces its spending). GDP could fall by up to -0.21%, which would lead to a recession. It's like when you realize that your cell phone's battery is dead and there are no outlets nearby. Everything is going wrong and you don't know what to do.

In my opinion, what is clear is that in 2025, what will most influence economic growth in Mexico will be how we behave as consumers, how much productive investment there is on the part of companies, how the government reacts to trade policy negotiations, how it manages its spending and whether inflation remains within coherent parameters. Although by proposing a model, it is possible to observe the variables that have the greatest impact and how they can be adjusted to support the economy, the result or efficiency of the model can be observed over time.