Mexican Economic Growth Probably Slowed as U.S. Expansion Cooled

Mexico’s economic growth probably slowed in the second quarter to about half its pace in the prior three months as exports of oil and some manufactured goods weakened amid a downturn in the U.S. economy.

Gross domestic product expanded 0.7 percent from the first quarter, when it grew 1.3 percent, according to the median estimate of seven economists surveyed by Bloomberg. Annual growth eased to 4.3 percent from 4.6 percent over the same period, analysts forecast. The national statistics institute will release the figures at 8 a.m. in Mexico City.

Economic growth in the U.S., which buys 80 percent of Mexico’s exports, slowed to a 1.5 percent annual rate in the second quarter amid unemployment that has held above 8 percent for more than three years. While Mexico’s expansion may have slowed from the fastest pace since 2010, growth has topped Brazil’s the past four quarters. The central bank said last month that monetary policy is adequate with the economy on a positive trajectory.

“We’re seeing a moderation in the manufacturing cycle from previous quarters,” Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co. (JPM), said by phone from Mexico City. “It’s not something we should be too worried about, and it’s in line with a decrease in dynamism in the United States.”

Annual growth will slow to 2.9 percent in the third quarter before rising to 3.1 percent in the final three months of the year, according to the median estimates in a Bloomberg survey.

Company Earnings

Earnings for Mexican companies such as Coca-Cola Femsa SAB (KOFL) and Desarrolladora Homex SAB (HOMEX*) reflected the slowdown in demand. Homex, Mexico’s largest homebuilder by sales, has cut its 2012 revenue projection, while Femsa, Latin America’s biggest Coke bottler, reported second-quarter profit that trailed analysts’ estimates.

The central bank may be limited in its ability to cut interest rates to boost growth after annual inflation breached its 2 percent to 4 percent target range in June and reached a 28-month high of 4.42 percent in July as a bird flu outbreak and drought drove up farm prices.

Mexico’s central bank has kept the nation’s benchmark rate at 4.5 percent since July 2009, the lowest level among major rate-setting banks in Latin America after Peru.

Central bank Governor Agustin Carstens said in a July 26 interview that the effects of higher food prices will be temporary and isolated, and that Mexico’s stability will enable the economy to outpace Brazil’s expansion in coming years.

Easing Inflation Risk

The chances of a “severe weakening” in the global economy have caused medium-term inflation risks to abate and the growth outlook to worsen, according to the central bank’s last rate decision on July 20.

Mexican exports grew 3.8 percent in the second quarter from the same period a year earlier, down from 11.6 percent in the first three months of 2012, according to the statistics institute. Oil exports fell 14 percent from a year earlier as crude prices dropped from a nine-month high in February to an eight-month low in June, according to calculations based on statistics institute data. Growth in shipments of non-auto manufactured goods slowed to 7.1 percent in the second quarter from 7.4 percent in the first, data from the agency showed.

Signs of slowing growth haven’t fazed investors in Latin America’s second-largest economy. Mexico’s peso has rallied 6.1 percent this year, the most among 16 major currencies tracked by Bloomberg.

Bond Yields

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries dropped 63 basis points to 159 this year through yesterday, according to JPMorgan Chase & Co.’s EMBI Global Index. The yield on Mexican local-currency bonds due in 2024 fell to a record low on July 20 and slid 113 basis points, or 1.13 percentage points, this year through yesterday. The nation’s IPC stock index has climbed 10 percent this year, reaching an all-time high on July 27.

Mexico’s economy probably will feel the impact of a global economic slowdown more in coming months as spending projects that were ramped up before the nation’s July 1 presidential election came to an end, said Sergio Martin of HSBC.

“We’re seeing a slight downturn in external demand,” Martin, HSBC’s chief Mexico economist, said in a telephone interview from Mexico City. “We expect this slowdown to become more drastic in the third and fourth quarter.”

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net.

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net.

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