Mexican economy seen hit by U.S. slowdown

By Greg Brosnan

MEXICO CITY (Reuters) - Slowing U.S. demand for manufactured exports is forcing Mexican factories to scale back production, and may push Mexico's economic growth well below the government forecast for the year.

The latest Mexican industrial data last week showed output unchanged in February from a year earlier, while manufacturing output slipped 0.1 percent, and even the construction industry saw activity slow.

Mexican gross domestic product grew 4.8 percent last year but the government expects it to expand only 3.6 percent in 2007 as the economy of the United States, the destination for almost 90 percent of the country's exports, cools off.

With some economists expecting a more pronounced and prolonged U.S. downturn than previously predicted, Mexico's latest industrial output data has strengthened a view among many that the government will soon have to cut its forecast.

"The Mexican economy is very weak," said Eugenio Aleman, an economist with Wells Fargo Bank in Minneapolis, who believes Mexican GDP will likely grow between about 2.0 and 2.5 percent this year.

Mexican auto exports in particular have fallen for four consecutive months, and Aleman said GDP growth could fall as low as 1.0 percent if U.S. vehicle demand did not soon recover.

"There's probably something they know and I don't," he quipped with regard to the government's official growth forecast. "Everywhere you look, the numbers are not good."

Ricardo Amorim, an economist at West LB bank in New York, said in a research note he lowered his estimate for first quarter growth to 2.5 percent from 2.8 percent based on the poor industrial output figures.

The government, however, expects growth of between 3.0 and 4.0 percent for each of the first two quarters of the year.

ECONOMIES JOINED AT THE HIP

Factories producing manufactured goods like cars and machinery for the United States are the main engine of Mexico's economy but materials like glass and cement for the U.S. housing industry also weigh heavily.

Those sectors depend heavily on demand from the worst hit areas of the U.S. economy -- manufacturing and housing.

"It's going to be very difficult for Mexico to avoid the difficulties that the United States is in," said Christian Stracke, an economist with research firm Credit Sights. "Mexico is right there in the middle of the problems that the United States is experiencing."

Stracke believes the Mexican economy will grow between 2.5 percent and 3.0 percent.

While consumer spending is not as important to Mexico's economy as it is to that of the United States, it has been picking up the slack left by a weakened industrial sector.