August 21, 2014 / 1:20 PM / 3 years ago

UPDATE 3-Mexico's economy picks up steam in second quarter

(Adds government maintaining 2014 growth forecast)

By Alexandra Alper

MEXICO CITY, Aug 21 (Reuters) - Mexican economic growth was stronger than expected in the second quarter as industrial activity and domestic demand perked up, signaling a recovery in Latin America’s No. 2 economy is gathering pace.

Gross domestic product grew 1.04 percent in the second quarter compared to the first three months of the year , as services and industry expanded at their fastest rate since the third quarter of 2013, data showed on Thursday.

The figure was above forecasts for 0.8 percent growth and the upwardly revised 0.44 percent rate reached in the first quarter. The finance ministry later said it would stick to a 2.7 percent growth outlook for the year.

Benito Berber, an economist at Nomura Securities, said the second quarter number was a positive surprise.

“It looks like the economy will accelerate little by little and a lot of that is thanks to the United States,” he said.

A sharp rebound in the U.S. economy helped Mexican factory output during the quarter after a harsh American winter dented U.S. demand for Mexican manufactured goods early this year.

Tax hikes had dampened consumer spending in the first quarter. The weak showing prompted the finance ministry to slash its 2014 growth forecast to 2.7 percent from 3.9 percent in May.

Mexican President Enrique Pena Nieto, who has guided a raft of reforms through Congress, said on Wednesday that the drive could spur annual growth of some 5 percent by around 2018.

Still, recent data has been patchy. Mexican industrial output shrank in June, in its first contraction since December, while consumer confidence fell to a five-month low in July.

Last week, Mexico’s central bank trimmed its 2014 growth forecast to between 2 percent and 2.8 percent, but policymakers said expansion would likely accelerate in the second half.

The central bank held its main interest rate steady in July after cutting it to a record low of 3.0 percent in June.

At an annual pace, Mexican GDP expanded 1.6 percent in the second quarter from a year earlier, above expectations for 1.5 percent growth and an upwardly revised 1.9 percent rise during the first quarter of this year.

A separate report on Thursday showed that, adjusted for seasonal swings, Mexico’s economy expanded by 0.23 percent in June compared with May, when activity rose by 0.12 percent. Compared with June 2013, the economy grew 2.73 percent, after expanding by 1.69 percent in May. (Reporting by Alexandra Alper, Luis Rojas and Noe Torres; Editing by Chizu Nomiyama and W Simon)

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