BUSINESS SECTION

Mexican growth forecast lowered after report second quarter did not meet expectations

August 18, 2005

JPMorgan Chase & Co., Credit Suisse First Boston, Santander Central Hispano SA and ING Groep NV cut their forecasts for Mexican growth this year after a government report showed the economy expanded less than expected in the second quarter.

JPMorgan reduced its growth forecast to 2.4 percent from 3.2 percent while Credit Suisse First Boston cut its forecast to 3 percent from 4 percent and Santander lowered its estimate to 3.2 percent from 3.5 percent. ING cut its estimate to 2.8 percent from 3.6 percent.

Latin America's largest economy expanded 3.1 percent in the second quarter from a year ago, below the 4 percent median estimate in a Bloomberg survey of 12 economists, as the agricultural industry slumped, rising interest rates curbed consumer spending and demand fell in the U.S. for Mexican-made cars. The economy shrank a seasonally adjusted 0.4 percent in the second quarter from the first quarter.

"The weakness is across all sectors," Alfredo Thorne, a Latin America economist with JPMorgan in Mexico City, said in a telephone interview.

This marks the second time in three months that economists have ratcheted down their Mexican growth forecasts. In May, banks including JPMorgan, Credit Suisse and Bear Stearns Cos. lowered their estimates after the government reported the economy grew 2.4 percent in the first quarter, the slowest pace in a year.

Mexico's central bank lowered its forecast for economic growth this year on July 27 to 3.75 percent. As recently as July 22 the central bank had said the economy would expand by as much as 4 percent. The economy grew 4.4 percent in 2004, the fastest expansion since President Vicente Fox took office in 2000.

Economists forecast secondquarter of 4 percent after the Finance Ministry gave that same prediction on Aug. 1.

Mexican stocks and the currency fell after the GDP report yesterday. The Bolsa stock index dropped 1.9 percent yesterday. It was little changed today, closing up 0.01 percent. The peso fell 0.2 percent yesterday and dropped another 0.3 percent today, leaving it at 10.6336 pesos to the dollar.

"It was a tough quarter," Michael Hood, an economist with Barclays Capital Inc., said yesterday.

Thorne said he still expects the economy to strengthen in the second half of the year, benefiting from stronger growth in the U.S., the buyer of 85 percent of Mexico's exports, and from a decline in domestic borrowing costs.

Thorne said the weaker-thanexpected second-quarter figures will prompt the central bank to cut the benchmark overnight rate from 9.75 percent, the highest since March 2003, by October to shore up the economy. He had previously forecast the first rate reduction would come in December.

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