UPDATE 3-Mexico growth slows in Q4, 2013 expansion at 4-yr low

Fri Feb 21, 2014 2:48pm EST

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MEXICO CITY Feb 21 (Reuters) - Mexico's economy slowed sharply in the fourth quarter as industry ground to a halt and the pace of services growth dropped, dragging annual growth to a four-year low, data showed on Friday.

The data highlights mounting concerns about Mexican growth, which has disappointed investors who were excited by a reform drive last year by President Enrique Pena Nieto.

Wavering U.S. demand for Mexican-made exports such as cars and televisions combined with a deep contraction in domestic construction to drag on growth last year.

The economy grew at a 1.1 percent rate in 2013, down sharply from a 3.9 percent expansion in 2012, the statistics agency said, marking its weakest performance since 2009 when Mexico slumped into a deep recession.

Polls have showed economists expect Mexico to grow about 3.4 percent this year, but some are already revising down their outlooks after recent weak data.

"The picture that comes out of that is that Mexico's recovery will be sort of gradual and maybe not as a strong and robust as expected," said Benito Berber, an analyst at Nomura Securities.

Barclays lowered its 2014 growth forecast to 3 percent from 3.7 after the data, noting that recent tax hikes and bad weather in the United States, Mexico's top trade partner, could put a damper on industry and consumption early this year.

Gross domestic product grew 0.2 percent last quarter compared to the prior three months, below expectations for a 0.45 percent expansion in a Reuters poll.

The figure also fell short of the upwardly revised 0.95 percent growth in the third quarter.

Mexico's central bank last week said growth is picking up, but that the economy is still recovering from a slowdown. Policymakers are seen holding interest rates at a record low of 3.5 percent this year as anemic growth offsets a jump in inflation.

Yields on interest rates swaps were little changed after the data, as investors stuck to bets that eye a rate hike by the end of the year.

The data showed the services sector grew nearly 0.2 percent compared to the previous quarter while industry shrank 0.04 percent. Construction had picked up in the fourth quarter, but factory output weakened.

Pointing to weak domestic demand late last year after lawmakers approved tax hikes, services shrank 0.3 percent in December, a separate report showed, its biggest contraction since June last year.

Compared to the last quarter of 2012, the economy expanded 0.7 percent, also below forecasts.

Pena Nieto convinced the divided Congress last year to approve the biggest deficit in over a decade to help pay for more infrastructure spending this year to boost growth.

But key components of his reform drive, including overhauls of the banking, telecommunications and energy sectors, are expected to take years to add significantly to growth.

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