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Tuesday, May 24, 2011

BUSINESS - Economic growth slows

BY JASON LANGE

AND LORENA SEGURA

Reuters

MEXICO CITY – Mexican economic growth slowed sharply in the first three months of the year as factories downshifted on a weaker outlook for exports to the United States, data showed on Thursday.

The slowdown was widely anticipated and economists don’t think it will derail growth of 4 percent or higher for the entire year. But it could help central bankers keep the country’s benchmark interest rate low at 4.5 percent to support the economy.

Gross domestic product grew 0.5 percent from the previous quarter, the national statistics agency said, less than half the fourth-quarter rate. The growth rate during the fourth quarter was revised lower to 1.1 percent.

“This is a signal that the central bank should be in no hurry to raise interest rates,” Santander economist Rafael Camarena said.

Mexico is limping back from a deep economic downturn even as regional peers like Brazil and Chile roar ahead.

The central bank said this month the economy could grow as much as 5 percent this year, although a summary of its most recent policy review showed policymakers divided about how much the recovery will fuel inflation.

“This casts doubt on the possibility of growing 5 percent this year,” said Barclays Capital analyst Jimena Zuniga in New York. “People could pare back some of the more optimistic expectations on the economy.”

Investors are betting the central bank will raise interest rates in December. Yields on 9-month interest-rate swaps were unchanged from before the data’s release, suggesting investors had not altered their bets on the direction of policy.

The data showed the economy expanding 4.6 percent in the first quarter from a year earlier.

Analysts polled by Reuters had expected an increase of 0.5 percent from the previous quarter and 4.95 percent from a year earlier.

Unemployment remains above pre-recession levels, keeping consumers and the service sector weak, and credit is just starting to expand.

The service sector expanded 0.9 percent in the first quarter – a slowdown from the 1.2 percent rate clocked in the fourth quarter.

EXPORTERS PINCHED

That has left Mexico dependent on demand from the United States, whose economic outlook has grown darker in recent months as higher gasoline prices hurt consumers.

Mexican industrial output fell in two of three months during the quarter. Economists at BBVA Bancomer said the slowdown was much more notable in export-oriented industries such as electronics.

Mexico sends about 80 percent of its exports to the United States, where growth also slowed sharply during the first quarter.

Some Mexican companies are feeling the pinch. Grupo Simec, which makes steel products used in appliances and cars, said this month its first-quarter profits fell 9 percent from a year earlier on lower sales volumes and high prices for raw materials.

At the same time, economists remain upbeat about growth prospects this year. Mexican factories are competing better against rivals in China where workers are demanding bigger pay hikes.

About six in 10 executives see Mexico as the best place to build a factory that would sell goods to the United States, according to a poll released last month by consultancy AlixPartners.

However, the poll also highlighted one of the Mexican economy’s chief risks: violence between drug cartels that threatens a collapse of law and order along its northern border.

One in five executives said their operations have been disrupted by security issues.