Mexico Central Bank Opens Door to Sub-1% Growth This Year

(Bloomberg) -- Mexico’s central bank cut its growth forecast for this year, opening the door to the possibility that Latin America’s second-largest economy will expand less than 1% amid weak industrial production.

Growth this year is likely to be 0.8% to 1.8%, less than the previously expected 1.1% to 2.1%, the central bank said in its quarterly inflation report Wednesday. The low end of that range is below all but one analyst forecast in a Bloomberg survey that has an average projection of 1.5%.

"We are adjusting the forecast range for this year downward due to temporary elements that mainly affected the first quarter," central bank Governor Alejandro Diaz de Leon said on Wednesday. While activity will likely rebound from a contraction in the first three months of the year, the economy is "trending toward a slowdown."

Mexico’s economy unexpectedly shrank 0.2% in the first quarter of President Andres Manuel Lopez Obrador’s term amid a contraction in service and industrial sectors. Despite the surprise, the central bank kept borrowing costs steady this month and analysts expect it to wait until November to cut the key rate from a decade high 8.25% as inflation remains above the 4% upper limit of the target range.

Read more: Lost Decade Specter Haunts Latin America as Big Economies Falter

The central bank also raised its inflation estimate, forecasting a 3.7% rate for the fourth quarter, citing energy and some services prices. The annual rate was 4.43% in the first half of May, and the board targets 3%, plus or minus one percentage point.

Slower economic expansion represents a blow to the country’s new president, known as AMLO, who pledged 4% average annual growth during his tenure. While Mexico will unlikely fall into a recession, if it did, the downturn would be mild and short-lived, said Jonathan Heath, who joined the central bank board this year.

Heath then made reference to a bet made by Alfonso Romo, the president’s chief of staff, who said this week there was a 100 to 1 chance of a recession.

"If you ask me to bet 100 to 1, that sounds very interesting," Heath said. "Anything can happen."

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