Mexican economy shrinks in first quarter, economists downgrade outlook

MEXICO CITY (Reuters) - Mexico’s economy shrank in the first quarter of 2019 from the previous three-month period, data showed on Friday, dealing a blow to the new government’s drive to convince investors it can boost growth in Latin America’s second-largest economy.

Mexico's President Andres Manuel Lopez Obrador attends a news conference, at the National Palace in Mexico City, Mexico, May 21, 2019. REUTERS/Henry Romero

President Andres Manuel Lopez Obrador took office in December pledging to ramp up lackluster growth and job creation.

But the economy shrank 0.2% compared with the October-December period as services and industrial activity dipped, the first contraction since the second quarter of 2018, according to data from national statistics agency INEGI. The contraction was particularly sharp in March.

“March was a very bad month for economic activity, clocking a 0.6% contraction,” Mexican central bank board member Jonathan Heath said on Twitter, citing monthly economic activity data also published on Friday.

Goldman Sachs economist Alberto Ramos said strikes and fuel supply disruptions earlier in the year had contributed to the slump.

After the data was published, Mexico's benchmark stock index .MXX fell more than 1% to a two-month low, the peso currency MXN= dipped into negative territory, and economic research consultancy Capital Economics cut its Mexican growth forecast to 1.8% for 2019.

“The weak Q1 GDP figure means the economy won’t, barring a major surprise, grow by the 2.5% that we had projected ... The next few years will be underwhelming for Mexico’s economy,” said William Jackson, Chief Emerging Markets Economist at Capital Economics.

Lopez Obrador brushed aside concerns about the data at his daily morning press conference.

“Investment is growing, I said it yesterday, our currency is strong, it is appreciating more than other currencies around the globe and inflation is stable. And there will be growth, much more growth. So we’re going to wait,” said Lopez Obrador.

Mexico received some $10 billion in foreign direct investment in the first quarter, up 7% from the same quarter last year, and inflation was slightly lower than expected in the first half of May at 4.43%.

The peso has appreciated over 6% since Lopez Obrador took office.

Still, some of the president’s decisions have rattled investors, prompting concern among private sector analysts.

The International Monetary Fund on April 9 lowered Mexico’s 2019 growth outlook to 1.6% from 2.1%, citing shifts in perception about policy.

In a note, Goldman Sachs’ Ramos said high interest rates would weigh on consumer spending, adding that the investment outlook was lackluster, partly due to uncertainty over the ratification of a new trade deal with Mexico’s top export market the United States.

The U.S. economy expanded 3.2 percent in the first quarter in annual terms, but some economists believe that growth rate will be short lived, bringing more gloom to Mexico.

“The projected deceleration of the U.S. economy may also weaken the thrust to activity from exports and foreign direct investment,” Ramos said.

In annual terms, Mexico’s economy expanded just 1.2%, slightly lower than the 1.3% growth preliminary data published last month showed. It was the weakest quarterly annual growth in a year.

Reporting by Anthony Esposito; Additional reporting by Miguel Angel Gutierrez and David Alire Garcia; Editing by Susan Thomas and James Dalgleish