JPMorgan Cuts Mexico’s Growth Forecast on Unexpected Output Drop

JPMorgan Chase & Co. cut Mexico’s 2013 growth estimate after industrial production in Latin America’s second-biggest economy surprised analysts by posting in June the second-biggest decline since November 2009.

The biggest U.S. bank trimmed its forecast for gross domestic product expansion to 2.4 percent from 2.8 percent after a government report showed output slid 2.4 percent from the same month a year earlier. The drop marked the fifth straight month production missed economists’ predictions and was worse than all 16 forecasts in a Bloomberg survey.

The central bank cut its own growth projection on Aug. 7, saying the economy may grow this year at about half the pace of 2012 amid stagnant manufacturing and a decline in public spending. Policy makers surprised analysts in March by cutting the benchmark interest rate to 4 percent amid signs the economy was slowing. They have kept borrowing costs unchanged over the past three meeting as inflation remains above the 3 percent midpoint of the target range.

“We are no longer confident in a sharp rebound in manufacturing in the third quarter,” JPMorgan economists Gabriel Lozano and Steven Palacio wrote in a research report e-mailed today. “While we still expect a lift in growth in the second half, we expect it to be milder and more gradual than anticipated.”

Slower Growth

GDP will expand 2 percent to 3 percent this year, compared with the 3 percent to 4 percent previously forecast, the central bank said in its quarterly inflation report published Aug. 7. Economic growth will probably accelerate in the second half of the year as exports to the U.S. pick up, central bank Governor Agustin Carstens told reporters.

Mexico’s peso gained 0.1 percent to 12.5918 as of 1:00 p.m. in Mexico City.

Government spending fell 2.8 percent in real terms to 1.89 trillion pesos ($150 billion) in the first six months of 2013 compared with the year-earlier period, according to data from the Finance Ministry. The drop was due to a change in administration after President Enrique Pena Nieto took office in December and has been corrected as of June, Finance Minister Luis Videgaray said last month.

Housing Turmoil

Spending delays hit construction company Empresas ICA SAB (ICA*), whose credit rating was cut by Moody’s Investors Service and Standard & Poor’s amid declining earnings. Construction tumbled 6 percent and manufacturing dropped 1.2 percent, according to the statistics agency.

Mexico’s three largest homebuilders have posted the biggest losses on the nation’s IPC equity index this year as a shift in government housing policy drained their cash. The companies are looking to restructure debt and have missed bond payments as the government promotes urban developments over homes in outlying areas where the builders hold large reserves of land.

The industrial production numbers “are disappointing, they’re weak, they show that construction has yet to recover,” said Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut. “The central bank has basically written off the second quarter but is expecting a recovery in the third.”

Bright Spot

The monthly seasonally-adjusted figures were one bright spot in today’s report, showing manufacturing expanded 0.5 percent in June from May, Tanuja Gupta, an analyst at Nomura Holdings Inc., said in an e-mail.

“Though the headline number came in negative, going forward we could see some recovery in industrial activity driven by a recovering manufacturing sector and infrastructure projects taken up by the government,” Gupta said.

The slowdown means that growth is unlikely to put pressure on inflation, Carstens said Aug. 7. Consumer prices fell in July for the third straight month as food and merchandise prices declined. Annual inflation was 3.47 percent compared with 4.09 percent in June, slowing to within the central bank’s 2 percent to 4 percent target range for the first month since February.

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