Mexico Central Bank Cuts 2013 GDP Forecast as Exports Stall

Mexican policy makers cut their growth forecast for this year in half after stagnant exports and a stifled construction industry led them to reduce interest rates by the most since the 2009 recession.

Gross domestic product will expand 0.9 percent to 1.4 percent this year, compared with the 2 percent to 3 percent previously forecast, the central bank said in its quarterly inflation report published today. It reduced the growth estimate for 2014 to between 3 percent and 4 percent, from 3.2 percent to 4.2 percent. Following the approval of new levies on junk food and sugary drinks, the bank raised its inflation estimate for next year to 3.5 percent from near 3 percent.

A drop in public spending and the devastation from twin hurricanes in September have slowed industrial output and domestic demand more than expected by economists, who now say GDP will grow by a third the rate of 2012. Central bank Governor Agustin Carstens has cut the overnight rate three times this year by a total of 1 percentage point to a record low. While industrial output and services have shown favorable signs, housing construction and spending on public works remains weak, Carstens said today.

“The risks to the downside for growth in the Mexican economy, while they are less than in the most recent months, remain elevated,” the central bank said in its report.

Industrial Output

Analysts polled by Banxico forecast 2013 growth of 1.24 percent after a 3.9 percent expansion last year as industrial production contracted 0.6 percent in the second quarter and retail sales shrank unexpectedly in two of the past three months. Industrial output continued to fall in July and August, dropping a revised 0.2 percent and 0.7 percent respectively, and the government estimates growth slowed to 1 percent in the third quarter from 1.5 percent in the previous three months.

Economists also lowered their 2014 growth estimate in Banxico’s Nov. 1 survey to 3.41 percent from 3.59 percent.

Carstens said in an Oct. 30 interview that the central bank shouldn’t cut the key interest rate any lower than the current 3.5 percent as the tax increases give a temporary boost to inflation.

Inflation has slowed in each of the past five months to 3.39 percent in September. The rate dropped to 3.33 percent in October, according to the median estimate of analysts in a Bloomberg survey. The national statistics agency will publish the October results tomorrow.

New Taxes

Mexico’s Congress passed a new 8 percent tax on junk food and a 1 peso-per-liter duty on sugary drinks and raised sales taxes at the border to 16 percent from 11 percent. The same day, Congress passed a 1.5 percent deficit as part of the revenue portion of next year’s budget.

“The revenue law approved in the Senate will have a relatively small and temporary impact on inflation,” Carstens told reporters yesterday.

Banco de Mexico reduced the overnight lending rate by 25 basis points on Oct. 25 and Sept. 6 and by a half point in March. Previous to that, the bank hadn’t touched rates since slashing them 3.75 percentage points in 2009.

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