Mexico's economy contracted for the first time in four years in the second quarter as lower government spending, sluggish consumption and weak demand for exports hammered industry and services in Latin America's No.2 economy.
The contraction took investors by surprise, but many stuck to bets that the central bank will keep interest rates on hold as it watches for the withdrawal of U.S. economic stimulus measures.
The Mexican economy shrank by 0.74 percent in the second quarter compared with the first quarter, the national statistics agency said on Tuesday, well below forecasts in a Reuters poll for a 0.21 percent expansion.
Mexico's government had already lowered its growth forecast for the year to 3.1 percent, and some analysts expect another revision, given the poor second-quarter data.
"That's a horrible number ... There's no way of belittling the bad number," said Alberto Bernal, head of research at Bulltick Capital Markets. "With this number in mind, of course it clearly shows that the risk is that growth for the full year is going to be close to 2 percent."
President Enrique Pena Nieto is betting on a wide-ranging package of economic reforms to boost growth, but those measures are still in the pipeline and it will be months, at best, before they translate into gains.
While poor growth data normally gives a central bank reason to cut interest rates, all eyes are on when the U.S. Federal Reserve will start to pull back on its economic stimulus program, limiting Mexican policymakers' room to maneuver.
Mexico's second-quarter economic growth compared with a year earlier was 1.5 percent, well short of expectations for 2.32 percent in a Reuters poll.
The Mexican peso pared its gains after the data.
The central bank, which has also cut its growth outlook for 2013, has said it is confident growth will pick up in the second half.
The bank cut interest rates to a historic low of 4 percent in March, but most expect it will not take advantage of cooling inflation to cut rates further this year.
Fears of a tapering of the Fed's bond-buying program, which has supported appetite for risky assets, hit Mexico's peso hard in June but the currency has since steadied.
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