Mexican economy stalls with declines in oil and industry output

MEXICO CITY (Bloomberg) -- Mexico’s economy stalled in the second quarter amid a drop in oil and industrial output and a slowdown in services activity.

Gross domestic product declined 0.2% from the previous quarter in seasonally adjusted terms, compared with the preliminary 0.1% contraction estimate and a 1% expansion in the first quarter, Mexico’s national statistics institute reported on Friday. Non-seasonally adjusted GDP rose 2.6% from a year earlier.

While the economy is expected to expand faster this year than in 2017 due to a pickup in spending that preceded the July 1 election, the path ahead is far from smooth. The International Monetary Fund last month cut its forecast for Mexico’s 2019 growth, citing trade tensions as well as uncertainty over the North American Free Trade Agreement and the president-elect’s policy agenda.

Andres Manuel Lopez Obrador spurred concern this month by saying he will hold a public referendum on whether to cancel construction of a $13-billion international airport for Mexico City, the biggest infrastructure work of President Enrique Pena Nieto’s administration. The group managing the project already suspended some bidding until the president-elect resolves its future. He has said the airport is too expensive and mired in corruption, and, at times, has proposed turning it into a concession or canceling it altogether.

The incoming president has also raised eyebrows by saying he will review oil contracts already awarded for signs of potential corruption, and by naming an industry novice to head state-owned crude producer Petroleos Mexicanos, the nation’s largest company. Turning around Pemex will not be easy, given 13 straight years of declining output and a debt load that exceeds $100 billion.

Lopez Obrador also pledges an expansion of public spending on programs for the elderly and youth and an investment of 75 billion pesos ($4 billion) in the oil industry, financed mainly through cost-cutting and increasing government efficiency. That raises questions among economists about whether he can pay for it all without taking on debt or increasing taxes.

Mexico’s economy is expected to grow 2.2% this year and 2.1% in 2019, according to analysts in a survey released by Citigroup Inc.’s local unit on Tuesday. The economists see the central bank leaving the key interest rate on hold through the rest of this year and reducing it next year.

Service sectors including commercial activity, transportation, financial and media grew 0.2% from the previous three months, compared with a 1% expansion in the first quarter, according to the statistics institute. Industrial sectors including mining, construction and manufacturing declined 0.3%. Agriculture, livestock and fishing industries shrank 2.1%.