(Reuters) -Mexico’s economy shrank more than expected in the fourth quarter on a sequential basis, preliminary data from national statistics agency INEGI showed on Thursday, marking its first quarter-on-quarter contraction in over three years.
The negative figure comes as Mexico braces for potential U.S. import tariffs that could further hit its economy, already facing the effects of tight monetary conditions, and ahead of a key interest rate decision by the central bank next week.
INEGI said Latin America’s second-largest economy was down 0.6% in the fourth quarter from the previous three-month period, slipping into negative territory for the first time since the third quarter of 2021.
It also undershot the 0.2% decline forecast in a Reuters poll of economists.
The economy was dragged down by an 8.9% quarter-on-quarter decline in the primary sector, which includes farming, fishing and mining, INEGI said. Secondary or manufacturing activities were down 1.2%.
“This is a terrible report, consistent with the overall story of slowing growth as the effect of tighter financial conditions hits harder and external conditions become less friendly,” Pantheon Macroeconomics economist Andres Abadia said.
On a yearly basis, Mexico’s gross domestic product (GDP) rose 0.6% in the October-December period, the slowest pace since the first quarter of 2021 and well below the 1.2% increase forecast in a Reuters poll.
Markets are now closely watching for potential U.S. tariffs on Mexico and Canada, which could heavily hit the Mexican economy and the local currency given the country’s huge trade ties with the United States.
The latest gross domestic product data may strengthen the case for the Bank of Mexico to speed up its pace of monetary easing next week, Capital Economics economist William Jackson said, but that would be contingent on avoiding U.S. tariffs.
The central bank lowered its benchmark interest rate by 25 basis points to 10% in December and signaled larger rate cuts could be considered in future meetings given progress on inflation.
“Banxico has tended to see weak GDP outturns as justification to cut rates,” Jackson said. A 50-basis-point cut “now seems the most likely outcome, with the big if being that U.S. import tariffs aren’t imposed in the coming days.”
Mexico’s GDP in the full-year was up 1.5% in real terms, with seasonally adjusted growth standing at 1.3%, INEGI added.
(Reporting by Ricardo Figueroa and Natalia SiniawskiWriting by Gabriel AraujoEditing by Frances Kerry)
