Mexico Cuts 2014 GDP Forecast to 2.7% as 1Q Disappoints

Mexico’s government cut its 2014 growth forecast after the economy recovered less than analysts estimated in the first quarter, held back by weak export demand and a tax increase that sapped consumer confidence.

The economy will expand 2.7 percent, down from a previous forecast of 3.9 percent, the Finance Ministry said today after the statistics agency reported first-quarter growth of 1.8 percent, compared with expansion of 0.7 percent in the fourth quarter. The median estimate of 24 economists surveyed by Bloomberg was for first-quarter growth of 2.1 percent. Gross domestic product rose 0.3 percent from the previous quarter.

“This is insufficient growth, less than what Mexico deserves and less than the potential we possess,” Deputy Finance Minister Fernando Aportela told reporters at a news conference in Mexico City. “What we see ahead for the next three quarters are factors that strengthen the view that Mexico is entering a faster growth cycle.”

Aportela echoed comments earlier in the week by central bank Governor Agustin Carstens that growth will pick up this year amid an economic rebound in the U.S., Mexico’s primary trade partner. President Enrique Pena Nieto has ended Mexico’s state monopoly on oil production and pushed through other industry overhauls to spur growth after the economy expanded less than analysts forecast in four of the past five quarters.

Spending Increase

The peso erased an earlier loss, rising 0.1 percent to 12.8630 per U.S. dollar at 11:12 a.m. in Mexico City. The yield on fixed-rate peso-denominated government bonds due 2024 fell 0.01 percentage point, or one basis points, to 5.88 percent.

Latin America’s second-largest economy is struggling to rebound from 1.1 percent growth last year, the slowest expansion since the 2009 recession. The government increased spending by 13 percent in the first three months of 2014 and the central bank kept borrowing costs unchanged at a record low 3.5 percent to fuel growth.

The bank lowered its 2014 growth forecast this week after consumer confidence plunged to the lowest level in almost four years earlier in the year, when new taxes took effect. The economy will grow 2.3 percent to 3.3 percent this year, Banco de Mexico said, down from a previous forecast of 3 percent to 4 percent.

Construction activity shrank 2.8 percent in the first quarter from a year earlier, extending its contraction to a sixth quarter. Industrial activity overall grew 1.6 percent.

Modest Recovery

Today’s data “gives little reason to cheer,” Rafael de la Fuente, an economist at UBS AG in Stamford, Connecticut, said in an e-mailed response to questions. “The economy is growing, but the recovery is extremely modest.”

Firms on Mexico’s benchmark IPC stock index reported first-quarter earnings that missed analysts’ estimates by 14 percent, according to data compiled by Bloomberg.

Mexico on Jan. 1 increased the sales tax along the U.S. border to 16 percent from 11 percent and implemented a new 1-peso-per liter duty on soft drinks and a 7.5 percent levy on mining profits.

Coca-Cola Femsa SAB, the world’s largest independent packager of Coke, said beverage volume in Mexico fell 4.4 percent in the first quarter, excluding the effects of a recent acquisition. The drop reflected “a continued weak consumer environment driven by lower disposable income levels, higher taxes and price increases across consumer staples,” Chief Financial Officer Hector Trevino told analysts and investors last month.

Recovering ‘Dynamism’

The economic weakness means that inflation isn’t facing demand-side pressures, Carstens said this week. Annual inflation slowed to 3.44 percent in early May, the lowest since October, though the central bank said it may quicken to above the 4 percent upper end of its target range for some months this year. JPMorgan Chase & Co. and Bank of America Corp. also see an inflation revival this year once the economy picks up steam.

Cemex SAB is starting to benefit from the economic improvement. The largest cement producer in the Americas saw cement volume in Mexico advance 1 percent in the first quarter after an 8 percent decline last year, the company said April 30. Sales in the country will continue to rebound as Pena Nieto accelerates public-works spending, according to Cemex Chairman Rogelio Zambrano.

‘Tremendous Recovery’

“We expect a tremendous recovery in Mexico,” Zambrano told reporters May 20 at a news conference in San Pedro Garza Garcia, Mexico. “The demand for cement will be very important.”

Mexico’s exports grew more than 4 percent from a year earlier in February and March, rebounding from a drop in January when the U.S. economy, the world’s largest, stalled amid harsh winter weather. Manufacturing output increased 6.8 percent in March from a year earlier, the biggest jump since February 2012, and economists expect growth to accelerate in each quarter this year to about 4 percent in the final three months, forecasts compiled by Bloomberg show.

For the economy, “my sense is that the worst is behind us,” Gabriel Lozano, the chief Mexico economist at JPMorgan Chase & Co., said in a phone interview from Mexico City. “The recovery in the U.S. is on track after a slow start to the year, so the outlook for Mexico from an external and domestic perspective is looking brighter.”

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