• Economy expanded 0.1% quarter-on-quarter, versus est. of 0.3%
  • Domestic growth is slowing under high borrowing costs

Mexico’s economy slowed more than forecast in the fourth quarter on waning exports and household consumption, fueling bets the nation’s central bank will start interest rate cuts in coming months.

Gross domestic product expanded 0.1% on a quarterly basis, less than the 0.3% median estimate of economists surveyed by Bloomberg. From a year earlier, it grew 2.4%, below the 3% median forecast, according to preliminary data released Tuesday by Mexico’s national statistics institute.

For for the full year of 2023, Mexico’s economy expanded 3.1%.

The strength of Latin America’s second-biggest economy continually surprised investors for much of 2023 before a proliferation of headwinds slowed momentum. Tight financial conditions, a strong currency and the gradual cooling of the US all challenged Mexico’s export-dependent growth in the fourth quarter and may further weigh on activity in 2024. Meanwhile, the central bank, known as Banxico, has signaled it will weigh a start to monetary easing.

“The sharper-than-expected slowdown in Mexico’s GDP growth, to just 0.1% q/q in Q4, is likely to be followed by continued sluggish growth over the coming quarters,” Jason Tuvey, deputy chief emerging markets economist at Capital Economics, wrote in a note. “At the margin, the data increase the chances that Banxico decides to embark on an easing cycle at next week’s Board meeting.”

Agriculture fell by 1.1%, industry was unchanged and services expanded just 0.1% compared to the prior quarter, according to the preliminary data.

What Bloomberg Economics Says

“Data for 4Q was below central bank projections and consistent with the positive output gap starting to moderate after widening earlier in 2023. It points to weaker upward pressure on prices and increases the probability the central bank starts to cut interest rates this year. ”

-Felipe Hernandez, Latin America economist

-Click here for the full report

High Rates

Consumers were hit by tight financial conditions imposed by the central bank, which raised the key rate to a record 11.25% in March and has held it there since. In the minutes to the December policy meeting, the bank board indicated it would be open to talking about cuts early this year, but did not signal exactly when easing could start.

Amid high rates, and after providing much of the economy’s momentum earlier in the year, households reined in consumption as inflation accelerated at the end of 2023, to 4.66%. Though holiday spending contributed to that print, external factors such as climate conditions also boosted agricultural prices.

A related drag on growth last year came via the appreciation of the country’s currency. The strong peso negatively affected the value of remittances as households received fewer pesos for every dollar sent back home.

Despite new inflows of capital as foreign companies expanded operations in Mexico — a process known as nearshoring through which they sought to be closer to US consumers — domestic growth last year owed much to government spending, with additional cash directed to flagship construction projects.

Manufacturing “depends strongly on the United States and we expect that it’ll have a deceleration. Last year, we already saw a strong deceleration in exports,” said Gabriela Siller, director of economic analysis at Banco Base. “The economic slowdown should help reduce inflation.”

Presidential Election

More government cash has been destined to pensions and other social programs this year, plus increased salaries for government workers, while projects such as the over-budget Maya train near the finish line. Analysts see the spending as partly directed to provide a boost before the presidential election in June, lining Mexico up to have its greatest budget deficit since 1988, according to the Finance Ministry’s proposal.

The candidate for the ruling party, Claudia Sheinbaum, remains the front-runner in the polls, and some Mexico-watchers also see the public expenditures as a means of appealing to President Andres Manuel Lopez Obrador’s supporters to turn out.

Second-place contender Xochitl Galvez, who represents a coalition of opposition parties, is narrowing the gap. A poll from El Financiero earlier this week showed that the difference between the candidates had shrunk six points.

On the whole, the latest Citibanamex survey shows that economists see the central bank’s key rate cut to 9.25% by the end of 2024. They are also predicting that the inflation rate will slip to 4%, on the top end of the bank’s target range, and that GDP growth will slow to 2.4%.

Growth has slowed “as the boost from one-off factors fade—including increased public works before AMLO ends his presidential term—the effect of tighter financial conditions intensifies, and external conditions become less friendly,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note. “Today’s numbers are a clear reminder that stiflingly high and rising real interest rates are no longer needed.”

Written by:  — With assistance from Rafael Gayol @Bloomberg

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