Mexico’s economy shrinks in first quarter

Economists see gloom ahead, though the country’s new president says growth, investment and currency are strong.

AMLO in Mexico
Mexican President Andres Manuel Lopez Obrador says that new economic data is not a cause for concern [Edgard Garrido/Reuters]

Mexico’s economy shrank in the first quarter of 2019 from the previous three-month period, as services and industrial activity contracted.

The new data released on Friday deal a blow to the new government’s drive to convince investors it can boost growth in Latin America‘s second-largest economy.

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

The economy shrunk 0.2 percent compared with the October-December period, 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 percent 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 labour strikes and disruptions to fuel supply in a number of Mexico’s states early in the year had contributed to the slump.

After the data was published, Mexico’s S&P/BMV IPC stock index fell more than 1 percent in midday trading, and the peso currency dipped into negative territory.

‘There will be growth’

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

“Investment is growing. I said it yesterday, our currency is strong,” Lopez Obrador said. “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.”

Mexico received some $10bn in foreign direct investment in the first quarter, up seven percent from the same quarter last year. Inflation was slightly lower than expected in the first half of May, standing at 4.43 percent.

In addition, the peso has appreciated over six percent since Lopez Obrador took office.

Still, some of the president’s economic decisions have rattled investors, prompting private-sector analysts to cut their Mexican growth forecasts for this year.

The International Monetary Fund (IMF) on April 9 lowered Mexico’s 2019 growth outlook to 1.6 percent from 2.1 percent. For 2020, the IMF dropped the forecast to 1.9 percent from 2.2 percent, citing shifts in perception about policy under the new administration.

In a note, Ramos said that high interest rates would weigh on consumer spending. He added 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 US economy expanded 3.2 percent in the first quarter in annual terms. But some economists think that growth rate will be short-lived, potentially bringing more negative prospects to Mexico.

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

Source: Reuters