Mexico’s Economic Growth Undershoots Forecasts as Woes Mount

(Bloomberg) -- Mexico’s economic growth unexpectedly slowed in the second quarter compared to the previous three-month period, as double-digit interest rates cooled demand.

Gross domestic product expanded 0.2% in the three months through June, matching the lowest forecast in a Bloomberg survey of economists that had a 0.4% median estimate. From a year ago, GDP grew 2.2% in the quarter, less than the 2.4% median projection, according to preliminary data published Tuesday by Mexico’s national statistics institute.

Annual output is forecast to slow for a third straight year in 2024 and for a fourth in 2025, but increased federal spending ahead of the national elections in June helped bolster the economy’s momentum. The government delivered payments to the elderly and other groups enrolled in public programs earlier to avoid interfering with election rules.

What Bloomberg Economics Says:

The results indicate the positive output gap is close to zero. Political uncertainty and lower public-sector spending in 2H will weigh on growth, increasing economic slack. Policymakers will have to balance that against current and expected inflation that remain above target and central bank forecasts. Still, we expect policymakers to wait for evidence the price outlook is firming up before it starts to cut interest rates. Slower growth is likely to add weakening pressure on the peso.

— Felipe Hernandez, Latin America economist

— Click here to read full report

Agriculture fell 1.7% on the quarter after heavy droughts impacted production and prices. Manufacturing and services each eked out gains of 0.3%, according to the national statistics agency.

“The weakness was pretty broad-based,” Kimberley Sperrfechter, an emerging markets economist at Capital Economics, wrote in a research note. She sees activity expanding 1.5% this year, below the average forecast of 2% in a Bloomberg survey. Today’s report is “the latest of a series of weak activity data and adds to the evidence that Mexico’s economy is struggling for momentum,” she added.

Underwhelming

Domestic demand had been a boon for the economy as consumers continued to spend even while weakness in the US, Mexico’s largest trading partner, affected exports. The peso, which had been one of the top-performing emerging market currencies in the world at the start of the year, faced a period of volatility and a slide in value after June’s election.

Banco de Mexico held rates at 11% at its most recent decision in June and economists are divided over whether it will deliver a 25 basis-point cut in August or hold until the following meeting in September. Inflation has accelerated since March, though some central bank board members had pointed out that the drivers were concentrated in the non-core component.

“Growth was a little underwhelming but not necessarily a precursor to a recession,” said Brendan McKenna, a strategist at Wells Fargo. A weaker domestic currency hurt remittances, likely damping consumer spending, while inflation remains a key economic problem. “Mexico still on pace to grow around 2% this year, so I don’t think this will be a material input into the next rate decision.”

The five-member board has been cautious, with Governor Victoria Rodriguez saying that they were open to a continuous discussion about whether to reduce rates. One board member in June did vote for a quarter-point drop, suggesting that other colleagues may also begin to see cause for a cut.

In a recent Citi survey, economists forecast that the next move in the key rate would be in August, and end 2024 at 10.25%. They also forecast growth 1.9% in 2024 and 1.5% in 2025. Inflation is seen to coming down to 4.4% by year-end.

“Board members have emphasized the country’s economic weakness, so this data supports our call for a 25bp cut,” at the August interest rate decision, said Gabriel Casillas, managing director at Barclays Capital Inc.

--With assistance from Rafael Gayol.

(Updates with economist comments in fourth paragraph)