July 20 (Bloomberg) -- Mexican unemployment probably rose to a record in June and economists predict the recession in Latin America’s second-largest economy may fuel more job losses through the middle of next year.

“We should expect more layoffs in the following months and definitely no new hiring,” Miguel Maron Manzur, president of the National Manufacturing Industry Chamber, said in a Mexico City interview. A recovery in the labor market “will depend on when the U.S. economy starts driving forward Mexican exports,” he said. Mexico sends 80 percent of its exports to the U.S.

The national statistics agency may say July 22 that joblessness rose to 5.6 percent in June, the highest since the government began the series nine years ago, according to the median estimate of seven economists surveyed by Bloomberg. Unemployment may climb to 6 percent by December, said Gabriel Casillas, the chief Mexico economist at UBS AG.

Mexico’s stocks and dollar bonds have lagged behind a rally in emerging markets this year on concern the nation’s dependence on the U.S. will cause the recession to last longer than in other Latin American countries. Casillas predicts Mexico’s gross domestic product will shrink 7 percent this year, the worst contraction since at least 1932, leading to more joblessness.

“It’s a bad situation,” Casillas said in a phone interview from Mexico City. “There have been massive layoffs.”

Mexico’s auto production slumped 48 percent in June from a year earlier to 101,991 cars and light trucks, the nation’s Automobile Industry Association said July 13.

Manufacturing Jobs

Declines in the manufacturing sector are causing layoffs in the rest of the economy, said Jonathan Heath, chief Latin American economist with HSBC Holdings Plc in Mexico City.

“As the non-oil export sector slows down, the rest of the economy slows down with it,” Heath said. “Mexico doesn’t really have another engine of growth.”

Formal jobs registered with Mexico’s social security system declined by 268,791 in the first six months of this year.

Mexican unemployment will probably continue to rise throughout 2009, even as an increase in demand in the U.S. drives a recovery in the Mexican economy, Citigroup Inc. said.

“We would expect stronger drops in employment in the coming months,” Citigroup economist Arturo Vieyro wrote in a research note sent July 15. “The impact of the recession on employment will last until the middle of 2010.”

Brazil Comparison

Mexico’s peso has gained 2.5 percent this year, lagging behind a 20 percent rally for both the Brazilian real and Chilean peso. Mexico’s currency may decline 8 percent to end the year at 14.5 per dollar, Casillas said July 15.

Mexico’s dollar bonds have returned 6.2 percent this year while Latin American debt overall gained 12.8 percent, according to JPMorgan Chase & Co.’s EMBI+ index.

Mexico’s Bolsa stock index is up 15 percent in 2009, trailing a 39 percent gain for Brazil’s Bovespa stock index.

Brazil is attracting investment to its energy industry and using fiscal stimulus to boost domestic demand, Casillas said. Brazil injected $100 billion into money and currency markets and cut taxes on cars and construction materials to revive growth.

Brazilian unemployment fell for a second straight month in May, declining to 8.8 percent. Brazilian labor figures measure employment only in the country’s six largest metro areas, while Mexican figures take into account rural workers. Brazil’s government expects the economy to create 1 million jobs in 2009.

The International Monetary Fund predicts Mexico’s economy will shrink 7.3 percent in 2009, compared with a 1.3 percent contraction for Brazil.

Mexican President Felipe Calderon announced an economic stimulus package in January to add 120 billion pesos ($8.2 billion) to the economy. Congress failed to vote on several stimulus bills before beginning a four-month recess in May.

Standard & Poor’s cut the outlook on Mexico’s credit rating to negative in May, six months after Fitch Ratings did. S&P and Fitch rate Mexico’s foreign debt BBB+, the third-lowest investment grade rating. The agencies cited the government’s low tax revenue and dependence on crude oil exports.

Markets Last Week

Mexico’s Bolsa index climbed 8.8 percent last week to 25,741.96, its first gain in three weeks. The advance was led by Alfa SAB, the world’s largest maker of aluminum engine heads and blocks, whose earnings before interest, taxes, depreciation and amortization rose 25 percent to 3.61 billion pesos in the second quarter.

The peso posted its biggest weekly gain since May on speculation the central bank’s seventh consecutive interest-rate cut this year will shore up the slumping economy. The currency advanced 2.6 percent to 13.3382 per U.S. dollar on July 17, from 13.6879 on July 10.

Yields on Mexico’s 10 percent bond due December 2024 rose nine basis points, or 0.09 percentage point, to 8.40 percent last week. The bond’s price fell 0.90 centavo to 113.74 centavos per peso, according to Banco Santander SA.

The following is a list of events in Mexico this week:

Event                                    Date        Forecast
June Unemployment Rate                   July 22       5.6%
Bi-Weekly Inflation                      July 23       0.2%
June Trade Balance                       July 23    $356 million
May Retail Sales                         July 24      -6.2%

To contact the reporters on this story: Hugh Collins in Mexico City at hcollins8@bloomberg.net; Valerie Rota in Mexico City at vrota1@bloomberg.net

Last Updated: July 20, 2009 01:00 EDT