Mexico Economy Posts Big Rebound That’s Seen Fading Out Soon

(Bloomberg) -- Mexico’s economic growth accelerated more than expected in the third quarter on solid domestic demand and a recovery of the agriculture sector, marking a pace that’s unlikely to be sustained going forward.

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Gross domestic product expanded 1% in the three months through September, above the 0.65% median estimate of economists surveyed by Bloomberg. From a year ago, GDP grew 1.5% in the quarter, more than the 1.3% median estimate, but less than the 2.1% the previous period, according to preliminary data published Wednesday by Mexico’s national statistics institute.

Domestic demand has been a boon for the economy as consumers continued to spend even while weakness in the US, Mexico’s largest trading partner, affected exports. A tight labor market, rising wages and remittance flows running at record highs have helped to support brisk household demand.

What Bloomberg Economics Says

“We expect activity to continue rising into 2025, but annual growth to slow after strong gains in previous years. Nationalist government policies and waning public-sector investment are headwinds. Falling interest rates provide some relief, but monetary conditions remain tight. Uncertainty about the US election is a drag.”

— Felipe Hernandez, Latin America economist

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After drought-related shocks dissipated, agriculture expanded 4.6% in the quarter, while manufacturing and services grew 0.9% each, according to the national statistics institute.

The figures showed a solid, broad-based increase in real activity in the third quarter on buoyant services activity and firmer industry, said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc.

Monetary conditions are slowly being loosened, providing some relief. Banco de Mexico lowered borrowing costs by a quarter-point for a second straight month at its September meeting, to 10.5%.

‘Limited’ Optimism

Looking ahead analysts are still forecasting that Latin America’s second-biggest economy will slow for a third straight year in 2024 and yet again in 2025.

While the central bank has reduced the benchmark interest rate twice in a row, it remains in double digits. Headline inflation sped up to 4.69% in early October, above the bank’s 3% target.

“Optimism should be limited,” said Gabriela Siller, head of economic research at Grupo Financiero Base, pointing out that quarterly growth was driven by the volatile agriculture sector. “In any case, annual growth of 1.5% is still a slowdown from last year.”

A series of government constitutional reforms under President Claudia Sheinbaum has generated uncertainty and kept investors nervous. Those jitters are now looming over the nation’s reputation as a nearshoring hub, whereby companies set up operations in Mexico to have closer access to the US market.

Next week’s presidential election in the US has also generated concern, especially due to Republican candidate Donald Trump’s threats to increase tariffs on Mexican products. On Wednesday, the peso slumped to the lowest level since September 2022.

In late August, Banxico, as the central bank is known, reduced its growth forecast for this year to 1.5% from a previous estimate of 2.4%, and to 1.2% from 1.5% for 2025. Economists in the most recent Citi survey maintained their 2024 GDP projection at 1.5% and cut their 2025 outlook to 1% from 1.2% previously.

All analysts surveyed by Citi expect a third consecutive 25 basis-point reduction at Banxico’s next gathering on Nov. 14.

In the minutes to Banxico’s Sept. 26 rate decision, policymakers said that external factors like slowing US inflation and activity, as well as Mexico’s own economic sluggishness, should allow the bank to continue easing at its next meeting.

“We doubt that the economy will continue to perform this strongly given the mounting headwinds that Mexico faces, including from tight policy and lingering uncertainty caused by the judicial reform,” Kimberley Sperrfechter, an emerging markets economist at Capital Economics, wrote in a note.

--With assistance from Maya Averbuch and Rafael Gayol.

(Re-casts story, updates with analysts comments starting in fourth paragraph, swaps in chart with shorter main headline.)

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