Mexico economy shrinks for first time in four years

The Mexican economy unexpectedly contracted for the first time in nearly four years in the second quarter, adding to the recent string of disappointments from Latin America’s previously fast-growing economies, and from other emerging markets.

Latin America’s second-biggest economy shrank by 0.7 per cent compared to the first quarter of the year even as most economists expected a modest expansion. On an annual basis, the economy grew by 1.5 per cent.

“Weak data were the last thing that Mexican markets wanted after the rout of the past few days,” David Rees, from Capital Economics, wrote in a research note. “That being said we suspect that the second quarter will mark the low point.”

Stagnant exports to the US and muted public spending held back Mexico in the first half. But growth is expected to accelerate later this year as the eight-month-old administration of President Enrique Peña Nieto gets budgeted spending under way after government spending shrank by 5 per cent in real terms over the first five months.

Furthermore, an industrial recovery is expected to gain traction in the US, the largest market for Mexican exports which are dominated by manufactured goods.

Investors have become more optimistic about Mexico’s economic prospects thanks to a reform drive by Mr Peña Nieto which last week included a proposal to open the energy sector to private investment for the first time in 75 years. The government says this will boost annual economic growth by 2 percentage points by 2024.

Meanwhile, the Mexican central bank this month cut its forecast for economic expansion this year to between 2 and 3 per cent, from 3 to 4 per cent previously. Weakening growth had already led the central bank to cut interest rates by half a percentage point to 4 per cent in March.

“Should we be worried about the lack of growth in Mexico? We believe the problem is one of perception,” said Nomura analyst Benito Berber, citing over-bullish forecasts of US economic performance by analysts who may also have imagined that the effects of Mr Peña Nieto’s reform drive would come immediately.

Nonetheless, other Latin American economies have also reported slowing rates of growth, particularly among the commodity-dominated economies of South America as the China-fuelled commodity price boom starts to wane and local credit booms mature.

By John Paul Rathbone, Latin America editor