Mexico growth picking up but risks prevail - central banker

By Michael O’Boyle

MEXICO CITY (Reuters) – The Mexican economy appears to have strengthened in the third quarter but downside risks to growth prevail, a central bank member said on Friday, and a poll showed policymakers will likely cut interest rates next week.

Mexico‘s economy contracted in the second quarter for the first time in four years and economists have downgraded forecasts for expansion this year and next.

Deputy central bank governor Manuel Sanchez said the latest data suggested that Latin America’s second biggest economy “may have picked up in the third quarter”, pointing to improvements in factory production and exports.

However, Sanchez warned that a withdrawal of U.S. monetary stimulus could weigh on a rebound next year.

The central bank cut its benchmark interest rate to a record low of 3.75 percent in September to counter the economic slowdown. A Reuters poll on Friday showed 21 of 26 analysts see another 25 basis point cut on October 25.

Sanchez said an expected rebound next year could be hurt by slower U.S. growth and depressed Mexican construction.

“The outlook for the Mexican economy includes a recovery next year, although downside risks prevail,” he said in the text of a speech delivered in New York that was posted on the central bank’s website.

Analysts cut growth estimates for Latin America’s No. 2 economy in a Reuters poll issued on Thursday. Mexico’s economy is expected to grow 1.3 percent this year, down sharply from 3.8 percent in 2012, and expand 3.7 percent in 2014.

Data on Friday showed that Mexican unemployment rose in September, when massive floods hit the country, in a sign that the economy was still struggling after the slowdown in the first half of the year.

Sanchez, the central bank member seen as most worried about a renewal of inflation pressures, also warned global financial volatility could pose a threat to the pace of Mexican consumer price gains. Inflation, which eased to 3.4 percent in September, can come under pressure if a weak currency pushes up the price of imported goods.

Mexico’s peso has whipsawed this year, first weakening on the expectation that the U.S. Federal Reserve would begin to withdraw its monetary stimulus, which was expected by many in September.

When the Fed said the economy needed more time, the peso bounced back, helped by expectations U.S. policymakers would not pull back stimulus this year. Still, many economists expect a gradual withdrawal to start by early 2014.

Sanchez suggested the impact of less stimulus from the Fed could end up weighing down Mexican growth next year if Mexican bond yields rise too far and U.S. growth remains sluggish.

“Tapering may pose some risks to Mexico’s economic rebound if the effect of less benign international financial conditions is not sufficiently offset by that of a stronger U.S. economic outlook,” he said.

(Reporting by Michael O’Boyle; Editing by Simon Gardner, Krista Hughes and Andrew Hay)

Mexico growth picking up but risks prevail - central banker