Mexico Grows Less Than Forecast Reinforcing Rate Cut Outlook

Mexico’s economy grew less than analysts expected in the first quarter, fueling bets policy makers will cut interest rates again this year.

Gross domestic product in the first three months of the year rose 0.8 percent from the year-ago period, less than the 1.1 percent median estimate in a Bloomberg survey of 18 economists. GDP grew 0.5 percent from the previous quarter, an annualized rate of 1.83 percent. The median estimate from seven analysts surveyed by Bloomberg was for a 0.3 percent gain.

The economy is growing at its slowest pace since GDP contracted 6.2 percent in 2009 in the aftermath of Lehman Brothers Holdings Inc.’s collapse. Today’s report showing industrial output is contracting increases the probability policy makers will cut rates as soon as July, said Gabriel Casillas, chief economist and head of research at Grupo Financiero Banorte SAB.

“It’s a very low growth figure and shows the economy is decelerating,” Casillas, who is based in Mexico City, said in a telephone interview. Mexico was hurt by “the slowdown in manufacturing of the U.S. that started in the fourth quarter of last year.”

Swap Rates

Six-month interest-rate swaps, which reflect traders’ expectations of monetary policy, fell two basis points, or 0.02 percentage point, to a record-low 4.16 percent at 9:10 a.m. The swaps show traders assign a 72 percent probability that Banco de Mexico will cut rates by October. On May 3, traders saw a 32 percent chance of lower borrowing costs next semester.

The central bank unexpectedly cut its key rate by half a point to 4 percent on March 8, the first reduction in more than three years. The key rate was kept unchanged in April as inflation climbed above the central bank’s target range.

Banorte, Grupo Financiero BBVA Bancomer SA and HSBC Holdings Plc began forecasting this year’s second rate cut after central bank Governor Agustin Carstens said on May 8 that inflation will fall within the bank’s target range in the second half and downside risks to the economy persist.

The banks previously expected Banco de Mexico to keep interest rates unchanged.

Growth Forecasts

The peso weakened 0.5 percent to 12.3347 per dollar and has rallied 4.3 percent this year, the most among 16 major currencies tracked by Bloomberg. Yields on Mexican government notes due in 2024 fell one basis point to 4.61 percent.

Analysts have cut their forecasts for growth this year in each of the past three monthly surveys by the central bank, reducing the average estimate to 3.35 percent from 3.55 percent.

Activity in industrial sectors such as mining, construction and industrial manufacturing contracted 1.5 percent in the January to March period from a year earlier.

Annual inflation in Latin America’s second-biggest economy was 4.65 percent in April, above the central bank’s 2 percent to 4 percent target range. Policy makers expect price increases to slow to below 4 percent in the second half of the year.

U.S. Economy

The U.S., which buys about 80 percent of Mexico’s exports, grew an annualized 2.5 percent in the first quarter, less than the 3 percent forecast by analysts, and signs of weakness have persisted. Housing starts slumped to a five-month low in April and industrial production fell in the same month by the most since August.

Mexican companies on the stock exchange reported first-quarter sales of 62 billion pesos ($5 billion), 1.8 percent less than analysts’ estimates, according to data compiled by Bloomberg. That was the worst performance since April-through-June 2010, when revenue was 3.76 percent less than forecast.


Three of the four most disappointing results were homebuilders, as a shift in government policy to promote more capital-intensive apartment construction in urban areas over single-family homes in commuter towns depleted the companies’ cash. Urbi Desarrollos Urbanos SAB and Corp. Geo SAB missed debt payments as revenue fell short of analysts forecast in the first quarter.

The homebuilding industry contributed to sluggish growth, Alonso Cervera, an economist at Credit Suisse Group AG, said.

“We will need to see a material recovery in external demand for our exports for overall GDP growth to make a stronger recovery,” he said in an e-mail.