Search

Mexico Central Bank Cuts GDP Forecast on Weak U.S. Expansion

By Eric Martin and Nacha Cattan
May 21, 2014 6:20 PM EDT

Mexican policy makers lowered their 2014 growth forecast for the second time following stagnation in the U.S., the nation’s top export market, and a drop in consumer spending.

Gross domestic product will rise 2.3 percent to 3.3 percent this year, down from the previous forecast of 3 percent to 4 percent, the central bank said in its quarterly inflation report today. The forecast for next year was left unchanged at 3.2 percent to 4.2 percent.

Central bank President Agustin Carstens said he still expects growth to pick up later in the year after a poor first quarter as the U.S. economy rebounds. President Enrique Pena Nieto has ended the state’s monopoly on oil production and pushed through other industry overhauls to spur growth in Latin America’s second-biggest economy after it expanded less than analysts forecast in three of the past four quarters.

“The most important part of the deceleration may have already taken place, and we expect more vigorous growth going forward,” Carstens said today in a presentation of the report in Mexico City. Mexico’s weakness was “a temporary bump that to a great extent reflects the slowdown in the U.S.”

Peso Weakens

The central bank’s board has left its key interest rate at a record-low 3.5 percent for almost seven months, saying in its most recent decision that the economy probably grew less than expected in the first quarter.

Mexico’s peso dropped after the report, falling 0.1 percent to 12.9272 per U.S. dollar at 4 p.m. in Mexico City, the weakest closing level since May 15. It was the only major Latin American currency to fall today.

“Banxico’s forecast surprised because the revision was more negative than expected,” Alexis Milo, the chief Mexico economist at Deutsche Bank AG in Mexico City, said by e-mail. “Banxico will stick to its current monetary policy and will go higher in tandem with the Fed.”

Exports fell at the start of the year as the economy in the U.S., the world’s largest economy, stalled amid harsh winter weather that chilled demand, while Mexican consumer confidence fell to an almost four-year low following a tax increase. Both indicators have since rebounded.

The statistics institute will probably report on May 23 that the economy grew 2.1 percent from a year earlier in the first quarter, according to the median forecast of analysts surveyed by Bloomberg.

The labor market remains slack and the output gap, which continues to be negative, will probably close in late 2015 or early 2016, Carstens said.

Forecast Cuts

Mexico is the second major Latin American nation this week to cut its growth forecast. Chile reduced its GDP projection for this year by almost a third on May 19 as a drop in copper prices led to the slowest expansion in four years in the first quarter.

Mexico’s economic weakness means that inflation isn’t facing demand-side pressures, Carstens said. Consumer prices rose 3.5 percent in April from the year earlier, the slowest pace since October, as the economy remained weak and the impact of tax increases that had spurred inflation at the start of the year waned.

Inflation may climb above the 4 percent upper end of the central bank’s target range for some months in the second half of the year before slowing to end 2014 below 4 percent, Banxico said. It should slow to just above 3 percent early in 2015, the bank said.

Weak Activity

“The report reiterates vigorously that the inflation outlook has improved significantly since the spike in inflation caused by the new taxes in the 2014 fiscal program in early January,” Deutsche Bank’s Milo said in an e-mailed research report. “The combination of an improving inflation outlook and weak economic activity creates conditions for the current monetary policy to be maintained this year and most of 2015.”

Economists have cut their 2014 growth and inflation estimates since the start of the year after consumer spending proved weaker than expected following the tax increase.

Analysts estimate the economy will expand 3.01 percent in 2014, according to a monthly central bank poll published May 7, down from a 3.4 percent forecast in February. They reduced their year-end inflation projections to 3.85 percent from 4.09 percent over the same period.

The economy grew 1.1 percent last year as debt defaults by the largest homebuilders and twin hurricanes contributed to the worst performance since the 2009 recession. The government raised spending 13 percent this year through March in a bid to boost growth.

Annual price increases has slowed from an eight-month high of 4.48 percent in January. On Jan. 1, Mexico increased the sales tax along the U.S. border to 16 percent from 11 percent, implemented a new 8 percent tax on junk food, a 1-peso-per-liter duty on sugary drinks and a 7.5 percent levy on mining profits.

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Randall Woods, Robert Jameson

More related content »