By Gabriel Araujo
(Reuters) – Mexico’s economy shrank in the fourth quarter for the first time in more three years, official data showed on Friday, as the central bank expects at best lackluster growth next year and economists see stiff risks ahead including trade tensions.
Statistics agency INEGI estimated that gross domestic product (GDP) contracted 0.6% in the October-to-December period when compared to the previous quarter, matching market expectations in a Reuters poll.
The data, marking the first drop on a sequential basis since the third quarter of 2021, confirmed preliminary data from INEGI last month that underscored ongoing challenges faced by Latin America’s second-largest economy.
Fourth-quarter GDP was dragged down by an 8.5% quarter-on-quarter decline in the economy’s primary sector, which includes farming, fishing and mining. Secondary or manufacturing activities were down 1.5%, though services grew 0.2%.
“These figures confirm that growth slowed in Q4 due to several headwinds, including tight financial conditions, heightened external risks, domestic uncertainty and bad weather,” said Andres Abadia of Pantheon Macroeconomics.
Slowing economic activity, coupled with cooling inflation, is seen helping drive borrowing costs lower in Mexico, where the benchmark interest rate stands at 9.50%.
On Thursday, the central bank signaled it might continue cutting the rate at future meetings and could “consider adjusting it in similar magnitudes” to its most recent 50-basis- point reduction.
“Lower interest rates, falling inflation and still-healthy real wages will prevent a prolonged contraction in the short term,” noted Abadia.
“The key threat remains the risk of a tariff war,” he added, referring to threats from U.S. President Donald Trump to slap across-the-board duties on Mexican goods. The United States is by far Mexico’s top trade partner.
In annual terms, Mexico’s economy expanded 0.5% in the fourth quarter compared to a year earlier. Growth in the full year reached 1.2%.
The Bank of Mexico expects growth this year to slow to 0.6%. It halved its forecast this week and even sees a possibility it could slide into recession, contracting by as much as 0.2%.
(Reporting by Gabriel Araujo; Editing by David Alire Garcia)
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