UPDATE 3-Mexico’s economy shrinks 0.35 pct in 1st qtr vs Q4

* Contraction seen as a setback for recovery

* Slow growth may give central bank room to keep rates low
(Adds quotes from economist, background)

By Jason Lange

MEXICO CITY, May 20 (BestGrowthStock) – Mexico’s economy shrank in
the first quarter as industry slowed and consumers shut their
wallets after getting hit with tax hikes and increases in
government-set prices for items such as gasoline.

Overall economic output contracted 0.35 percent during the
first three months of the year compared with the fourth quarter
of 2009, the national statistics agency said on Thursday
(MXGDPQ=ECI: ).

It was the first quarterly contraction in a year and a
setback for the economy’s recovery from a deep recession. It
could also help convince central bankers to leave interest
rates low in an effort to boost growth.

“This shows the recovery is losing steam,” said Bertrand
Delgado, an economist at RGE in New York.

U.S. demand for Mexican exports collapsed in late 2008,
sending Mexico into one of the worst recessions seen anywhere
in the world during the global financial crisis.

Mexico emerged from recession in mid-2009 as its car and
television factories stirred to life, but only after the
economy contracted about 9.0 percent from its peak.

Thursday’s data showed that the fast growth in factory
output notched at the end of 2009 did not carry over.
Industrial output dipped 0.07 percent in the first quarter.

At the same time, economic output was 4.3 percent higher in
the first quarter than it was a year earlier, highlighting how
far Mexico has come from the darkest days of the downturn. The
reading (MXGDPY=ECI: ) was higher than the median forecast of 3.8
percent in a Reuters poll.

LEGACY OF RECESSION

Yet Mexico has not fully disentangled itself from last
year’s crisis. The recession slammed government accounts,
leading Congress to raise the country’s value-added tax by one
percentage point on most consumer goods in January, while local
governments are now charging more for public services. The
federal government has also hiked gasoline prices.

These increases are hitting this year’s consumer spending,
which accounts for about two-thirds of Mexico’s gross domestic
product. For details see [ID:nN18147767].

For example, Gabriela Ortega, a Mexico City housewife, put
off buying a pressure cooker recently after her daily bus fare
rose by 25 percent.

Pressure cookers are considered to be basic appliances in
the Mexican capital because they cut cooking times at the
city’s high altitude.

“We’re just scraping by,” Ortega said.

Mexico’s service sector grew 0.26 percent during the
quarter, a sharply lower pace than the 0.89 percent growth
registered in the fourth quarter.

“First quarter GDP data for Mexico were much weaker than we
had expected and mean that our forecast for the economy to
expand by 4.5 percent this year now looks a touch ambitious,”
Capital Economics said in a report.

Ignacio Trigueros, an economist at Mexico’s ITAM
university, says the government’s fiscal adjustments will shave
about 1 percent off the economy’s potential growth this year.

Trigueros and other economists also expect consumers will
shake off the sticker shock in the second half of the year, as
the economy is seen growing between 4.0 and 5.0 percent.

That view is shared by the central bank, which is expected
to hold its benchmark rate at 4.5 percent, a 6-1/2-year low,
at Friday’s monthly review. Analysts don’t expect policymakers
to hike until late this year at the earliest. [ID:nN20158308]

Data also showed that economic activity was 6.91 percent
higher in March than it was a year earlier.

Stock Investing

(Editing by James Dalgleish)

UPDATE 3-Mexico’s economy shrinks 0.35 pct in 1st qtr vs Q4