As Mexico's economy weakens, some see a recession as unavoidable

By Gabriel Araujo

(Reuters) -Cooling Mexican economic activity and inflation data on Monday supported expectations that Latin America's second largest economy is headed towards a technical recession and fueled bets the central bank will move to keep cutting borrowing costs later this week.

Battered by a devastating drought last year and falling investor confidence, Mexico's economy shrank 0.2% in January from December and contracted 0.1% from January 2024, national statistics agency INEGI said.

The news comes after the economy shrunk in the final quarter of last year - its first quarterly GDP slump since the COVID-19 pandemic.

Analysts have told Reuters that a recession is likely as U.S. President Donald Trump's on-again, off-again tariffs wreak havoc on growth that was already weakening. A first-quarter contraction would mark a technical recession, defined as two straight quarters of negative growth.

"We now think a recession is unavoidable," JPMorgan said in an analysis note after Monday's economic activity data.

JPMorgan said consumer prices were beginning to respond to economic activity's "weak backdrop" and expects the Bank of Mexico to deliver a second consecutive 50 basis-point cut to the benchmark interest rate, taking it to 9%.

The view is shared by a majority of analysts polled by Reuters last week.

Inflation in the first half of March came in slightly below market forecasts on Monday, hitting 3.67% on an annual basis, INEGI said, down from 3.74% in the previous month and below the 3.75% expected by economists in a Reuters poll.

Inflation remains within the Bank of Mexico's 2% to 4% target range, which coupled with weakening economic activity has allowed the bank to lower borrowing costs.

"The economy is becoming more sensitive to tighter financial conditions and a less favorable external backdrop," Pantheon Macroeconomics' chief Latin America economist Andres Abadia said in a note to clients.

"The recent figures support Banxico continuing to cut rates at upcoming meetings, starting with a 50 bp move this week."

Mexico's annual core inflation, which some consider more reliable as it strips out volatile food and energy prices, slowed to 3.56% in mid-March from 3.63% a month earlier. Economists expected 3.57%, according to the Reuters poll.

In the 15-day period alone, headline consumer prices were up 0.14% whereas core inflation hit 0.24%, both slowing slightly from the previous month.

After lowering interest rates by half a percentage point last month, the central bank had stated it would consider similar adjustments in the future if inflation kept cooling.

"The drop in core services inflation and weak activity seal the deal on a 50-bp cut," Kimberley Sperrfechter of Capital Economics said.

(Reporting by Gabriel Araujo in Sao Paul; Writing by Brendan O'Boyle; Editing by Ed Osmond and Marguerita Choy)