Mexico economy contracts 0.6% in the fourth quarter as trade tensions loom

By Gabriel Araujo

(Reuters) - Mexico's economy shrank in the fourth quarter for the first time in more than three years, official data showed on Friday, as the central bank expects at best lackluster growth this year and economists see stiff risks ahead including trade tensions.

Statistics agency INEGI said 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.

In annualized terms, Mexico's economy expanded 0.5% in the fourth quarter compared to a year earlier. Growth for the full year reached 1.2%, the worst annual result since 2020, when the economy was heavily hit by the COVID-19 pandemic.

But on a quarter-on-quarter basis, fourth-quarter GDP was dragged down by an 8.5% 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.

"The key threat remains the risk of a tariff war," said Abadia, 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.

Separate INEGI data released on Thursday also showed that economic activity in the country was down 1% in December on a monthly basis, with weak service sector results adding to growth concerns.

"The decline in the services sector in December increases the likelihood that Mexico is in a recession," said Grupo Financiero BASE economist Gabriela Siller.

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 and Franklin Paul)