UPDATE 2-Weak industry numbers hint at Mexico slowdown

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By Greg Brosnan

MEXICO CITY, Feb 14 (Reuters) - Mexican industrial output rose a much weaker-than-expected 1.6 percent in December over the year-ago period, and analysts said it could be the first proof of a long-dreaded economic slowdown.

Analysts had been expecting a year-on-year increase of 3.76 percent, according to the median of a Reuters poll ECONMX.

Manufacturing rose 0.9 percent after output at export assembly plants largely making goods for shipment to the United States shrunk 1.3 percent, and the category including automobile production rose just 1 percent.

"It was a pretty bad number," said Benito Berber, an economist with HSBC Securities in New York. "It's the first very important indicator that the deceleration might have already started."

The Mexican government expects economic growth this year to fall to about 3.6 percent from about 4.8 percent in 2006 as growth slows in the United States, the main market for the country's products.

Recent data and comments on Wednesday by Federal Reserve Chairman Ben Bernanke suggest the U.S. economy may be healthier than previously thought despite a housing slowdown.

But Mexico's vital manufacturing sector has already felt the pinch from a fall-off in U.S. demand for its products -- with key auto exports falling in December and January.

"The slowdown continues," Lehman Brothers economist John Welch said in a research note published after Wednesday's data. "We expect even weaker numbers in January, especially in manufacturing."

Still a robust pillar of healthy consumer demand, which analysts say will somewhat bolster Mexico's economy, the construction industry rose 4.3 percent in December while the gas, electricity and water sectors rose 5.7 percent.

Mining production fell 3.1 percent following an 8.6 percent drop in oil production and a 3.9 percent increase in non-oil mining production.

Industrial output fell 0.56 percent in December compared with November, the government said.

While mining output tends to be volatile and could bounce back in January's data, oil output is seen as largely stagnant.

Still, economists are waiting for more data to confirm the economy's downturn.

Recent price hikes for food products have pushed up Mexican inflation, but the central bank has said the spike is temporary and analysts expect the bank to leave its key overnight interest rate flat in its Feb. 23 monetary policy meeting.

Berber said Wednesday's data would give it another reason not to tighten monetary policy.

"I think it's going to be very hard for (Bank of Mexico) to hike if you see these signs in the economy," he said.

Many economists see an interest rate cut in the cards in coming months as the central bank does its part to speed up flagging growth. The latest industrial output figures may add fuel to that view.