Mexico Industrial Output Unexpectedly Contracts in December

Mexico’s industrial production unexpectedly contracted in December, missing analysts’ estimates for the fourth time in five months, as the economy struggles to rebound.

Output dropped 0.3 percent from a year earlier, the national statistics institute said on its website today, compared with the median estimate for a 0.8 percent expansion from 17 economists surveyed by Bloomberg. Construction activity fell 2.5 percent and mining output declined 1.3 percent.

A financial collapse by the nation’s biggest homebuilders, stagnant demand for exports and delays in public spending prompted the government to cut its growth forecast for 2013 four times, to 1.3 percent from 3.5 percent. The economy will rebound to expand 3.9 percent this year, according to the Finance Ministry’s forecast.

Today’s report is “very disappointing,” Marco Oviedo, chief Mexico economist at Barclays Plc, who forecast output would increase 0.5 percent from a year earlier, said in an e-mailed response to questions. “The economy might be losing steam. I was expecting not-that-weak manufacturing and stronger construction.”

Economic Concern

The central bank reduced interest rates three times in 2013 to a record-low 3.5 percent in a bid to jump-start growth. It kept the rate unchanged in the past two decisions after saying at its October meeting that government spending will help fuel growth in 2014.

Mexico’s peso erased its gain following the report before rallying again, strengthening 0.3 percent to 13.2821 per U.S. dollar at 11:24 a.m. in Mexico City.

December’s industrial production data increase the risk that the Mexican economy won’t meet the Barclays forecast of 3.7 percent growth this year, Oviedo wrote in a separate e-mailed research report. While Mexico will probably leave interest rates on hold for the rest of 2014, further economic deterioration could spur additional borrowing-cost reductions, according to Oviedo.

Barclays reduced its 2013 growth forecast to 1 percent from 1.3 percent today, saying the industrial production report signals that growth in the fourth quarter was probably less than the bank previously estimated. The fourth-quarter gross domestic product report is scheduled for Feb. 21.

Rate Bets

Traders reduced bets for an interest-rate increase today, with yields on one-year swaps falling to 3.98 percent from 4 percent yesterday. They imply a 68 percent chance of higher interest rates in the next year, down from 100 percent a week ago.

Manufacturing activity increased 1.1 percent from a year earlier, less than the 2 percent median estimate in Bloomberg’s survey.

Industrial production declined 0.5 percent from November, compared with the median forecast for a 0.2 percent expansion. The decline adds to concern about the economy after consumer confidence unexpectedly fell in January to the lowest level since April 2010 and the purchasing managers’ index for manufacturing dropped to 49.7 in January from 50.3 the previous month, surprising economists, who expected an increase.