July 31, 2019 / 10:04 AM / 20 days ago

Mexico narrowly escapes recession, ekes out minimal second-quarter growth

MEXICO CITY (Reuters) - Mexico narrowly avoided slipping into a recession during the first half of 2019 as gross domestic product grew by a fraction in the second quarter, data showed on Wednesday, but economic weakness persisted across the board.

FILE PHOTO: Employees of NDP Technology, a private company specialised in PCB (Printed Circuit Board) assembly for different industries, works on a printed circuit board in Ciudad Juarez, Mexico June 3, 2019. REUTERS/Jose Luis Gonzalez/File Photo

A preliminary estimate published by the national statistics agency showed that Mexico’s economy, Latin America’s second largest, expanded by 0.1% in the April-June period from the previous quarter, when adjusted for seasonal swings.

A Reuters poll of economists had forecast GDP would be flat compared with the first quarter, when the economy shrank by 0.2% quarter-on-quarter. The statistics office is due to publish final data for the second quarter on Aug. 23.

During the first half of 2019, the economy grew 0.3% in adjusted terms from the same period a year earlier.

William Jackson, an economist at Capital Economics, said the data painted the picture of a struggling economy, arguing it could encourage Mexico’s central bank to cut interest rates.

“The key point is that this is still really, really weak,” he said. “We had already been penciling in a rate cut. Given the weakness of the economy and the way inflation is coming down, there is a reasonable chance of a (rate) cut in August.”

Economists generally define two consecutive quarters of negative GDP as a technical recession, though there is no established global definition for the phenomenon.

UNDERPERFORMANCE

While Mexico may have narrowly avoided a recession, its economy has been underperforming for over a year - a point made by Jonathan Heath, a deputy governor of the central bank appointed by President Andres Manuel Lopez Obrador’s government.

“The average annual growth of the last five quarters is 0.04%, which if you want to round it to a single decimal, is 0.0%,” Heath wrote on Twitter.

A breakdown of Mexican GDP data shows that primary activities, including agriculture, declined by 3.4% during the second quarter from the previous quarter, while secondary activities, such as manufacturing, were flat.

The meagre growth was fuelled by a 0.2% rise in tertiary activities, which include retail and services.

The government, however, denies that the economy is struggling. Lopez Obrador called the GDP figures “very good news” at his morning news conference, casting them as a rebuke to his critics.

Finance Minister Arturo Herrera echoed that optimism.

“We don’t believe we’ll enter a phase of negative growth in the next two quarters. In fact, we expect much more dynamic, positive growth in the second half of the year,” he said.

But perhaps mindful of the sluggish economy, the finance ministry earlier this week unveiled a $25 billion stimulus package aimed at ramping up growth.

Ariane Ortiz, an analyst at Moody’s, said the stimulus plan is likely to have a “limited impact” on the economy and saw no need to tweak the credit rating agency’s forecast of 1.2% Mexican growth in 2019 and 1.5% in 2020.

In fact, the risk was that those forecasts would need to be lowered, she said.

CONFIDENCE SHAKY

Investor confidence in Mexico has been shaken by some of the decisions made by Lopez Obrador, a leftist exponent of economic nationalism who took office in December vowing to reduce chronic inequality and deliver average annual growth of 4%.

In particular, the president’s decision to cancel a partly built, $13 billion airport for Mexico City and his retreat from the prior government’s opening of the oil and gas industry to private capital have raised doubts about his economic credentials.

During the past few months, private and public sector analysts have pared back their growth forecasts for Mexico, with some now predicting little expansion at all in 2019.

Lopez Obrador has said he expects growth of 2% this year.

The president has attacked critics of his policies as supporters of what he has characterized as a corrupt “neo-liberal” era that preceded his time in office.

However, he has also had to contend with the risk of economic disruption from the United States - the destination for around 80% of Mexico’s goods exports - because of tensions with U.S. President Donald Trump over illegal immigration.

In adjusted terms, the economy grew by 0.4% in the second quarter in comparison to the same period a year earlier. In unadjusted terms, it shrank by 0.7%, the figures showed.

Reporting by Dave Graham & Anthony Esposito; additional reporting by Sharay Angulo and Diego Ore; editing by Cynthia Osterman, Steve Orlofsky and G Crosse

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