Mexico Cuts 2016 GDP Forecast After Second-Quarter Decline

  • Finance Ministry expects growth of 2 percent to 2.6 percent
  • Economy shrank for first time since 2013 on weak oil, exports

Mexico cut its growth forecast for the second time this year after Latin America’s second-largest economy shrank last quarter, dragged down by a slowdown in the services industry and falling exports.

Gross domestic product will grow 2 percent to 2.6 percent in 2016, down from a previous estimate of 2.2 percent to 3.2 percent, deputy Finance Minister Fernando Aportela said at a news conference in Mexico City. The government also narrowed its deficit forecast for the broadest budget measure to 3 percent from 3.5 percent, largely due to a surplus it received from the central bank.

Earlier Monday, the nation’s statistics institute said GDP shrank 0.2 percent in the second quarter from the start of the year. While that’s smaller drop than a preliminary estimate last month, it’s the first contraction since 2013. From the previous year, GDP climbed 2.5 percent.

While Aportela said the contraction is probably due in part to difficulty estimating the seasonal effect of the Easter Holiday, which fell in the first quarter, Mexico has been hit by a slump in exports to the U.S., as well as falling oil prices and production that forced the government to cut spending. A slower expansion in domestic demand that had been the main source of growth for previous quarters further weighed on the economy.

"The big story is this two-speed economy," said Rafael de la Fuente, the chief Latin America economist at UBS AG in New York. "Clearly the industrial sector was weak in the second quarter, and that was true not only of the oil sector but manufacturing as well. Then you have the service sector and consumption doing better; they too lost some momentum, but that momentum is still relatively strong."

Peso, Banxico

The peso fell 0.4 percent to 18.2962 per dollar at 1:43 p.m. in Mexico City, briefly extending its decline after the growth forecast cut. The currency has weakened 6 percent this year after the Federal Reserve raised its key rate in December, plunging oil prices reduced the revenue available to fund government outlays and global risks increased.

Growth from a year earlier was led by farming output, which climbed 3.8 percent, while services expanded 3.2 percent. Industrial activity grew 1.0 percent.

The pace of annual expansion compared with 2.4 percent in the first quarter. Economic growth will slow this year to 2.3 percent from 2.5 percent in 2015, according to the median estimate of analysts surveyed by Bloomberg, after a slumping peso forced the central bank to raise the key interest rate one percentage point this year to 4.25 percent to head off a pick-up in inflation from higher import costs.

The central bank left the key rate on hold earlier this month, saying that the peso’s rebound from a record low in June is helping to curb inflation risks amid a weaker growth outlook.

Falling output at state-owned oil producer Petroleos Mexicanos has been one of the main drags on the economy. The company extended more than three years of losses in the second quarter as a cash injection from the government failed to overcome the pinch of record-low crude output, refinery upsets and a petrochemical plant explosion. The company’s exploration was crimped by a reduction in its spending in the first quarter.

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