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Mexico to escape recession after floods, but risks to growth rise: Reuters poll

A woman stands amidst the debris of her destroyed home in Agua Caliente, on the outskirts of Acapulco September 20, 2013. REUTERS/Claudio Va
A woman stands amidst the debris of her destroyed home in Agua Caliente, on the outskirts of Acapulco September 20, 2013. REUTERS/Claudio Va

By Dave Graham and Jean Arce

MEXICO CITY (Reuters) - Mexico is unlikely to be dragged into recession by severe flooding that has laid waste to large areas of farmland, destroyed homes and killed dozens of people, but the flooding has increased risk, a Reuters poll showed on Wednesday.

Mexican gross domestic product (GDP) suffered a surprise contraction of 0.7 percent in the second quarter compared with the previous three month period after eking out growth of less than one tenth of a point in the January-March period.

That stumbling performance has put Latin America's second biggest economy on track for its worst year since 2009.

A survey of 16 economists by Reuters said the floods that swamped Mexico after tropical storms Ingrid and Manuel bore down from the Atlantic and the Pacific on Sept 14-15 could shave a few tenths of a percentage point from GDP growth.

But with the economy showing some signs of recovery, none of them currently forecasts a recession in the third quarter.

"I don't know if it's going to be a recession, but it's going to be very weak," said Eugenio Aleman, an economist at Wells Fargo Bank in Charlotte, North Carolina.

A recession is generally defined as two consecutive quarters of contraction. Economists differed about how severe the short term impact of the flooding would be, and the most pessimistic estimated it could subtract up to 0.5 points off the end result.

The government last month cut its is growth forecast for this year to 1.8 percent, from just over 3 percent.

Most of the economic data has yet to be published for the third quarter, which does not end until next week. Official GDP figures for the period are not due until late November.

Growth forecasts for 2013 among the economists polled ranged from 0.9 percent to 1.8 percent. For the third quarter, the median forecast was GDP growth of 0.8 percent, with estimates ranging from 0.3 percent to 1.8 percent, the poll showed.

Mitigating fears, the coastal areas worst affected by the torrential rains contribute less to total economic output than the industrial heartlands in central and northern Mexico.

But the country has been rattled by the floods.

Policymakers have had to fend off questions over the risk that Mexico had slipped into recession due to patchy recent data, as well as the chaos caused by Ingrid and Manuel.

Industrial output suffered an unexpected drop in July and a survey of purchasing managers showed the manufacturing sector barely returned to growth during August.

But retail sales picked up in July and a gauge of overall economic activity rose nearly 0.5 percent that month from June.

RECONSTRUCTION

President Enrique Pena Nieto called the flooding the most extensive in Mexican history, and said the government will have to revise its budget plans for next year to repair the damage.

The torrential downpour has destroyed an estimated three percent of the country's farmland, killed at least 130 people, left tens of thousands of Mexicans temporarily homeless and wrecked thousands of miles of roads.

Some 40,000 tourists were stranded in the Pacific resort of Acapulco, and Mexican state power utility CFE had to declare force majeure on fuel imports after Manuel hit a major pipeline.

The flooding has also damaged some 43,000 schools - or about 20 percent of the total number in Mexico.

Pena Nieto, who had been readying a targeted boost to the economy even before the storms, has vowed to act fast, and reconstruction efforts could have a positive longer-term impact.

More spending on infrastructure and construction should lift the economy between October and December after a weaker third quarter, said Jorge Gordillo, an economist at CI Banco.

"My feeling is that this will end up outweighing the (negative economic impact)," Gordillo said.

For now, however, Mexico is scrambling to clean up the mess.

More than two thirds of the country was hit, and rains are still falling on parts of Mexico that suffered heavy flooding.

Risk assessment company Evaluacion de Riesgos estimated the total cost could be comparable to the havoc wreaked in 2005 by Hurricane Wilma, which swept through the Caribbean resort Cancun and the Yucatan peninsula, causing over $1.7 billion in damages.

Raul Feliz, an economist at Mexican think tank CIDE, saw the devastation sparked by the tropical storms cutting growth in the third quarter near to zero, and he said annual GDP expansion would probably not be much more than one percent in 2013.

That would easily be Mexico's weakest showing since the 2009 recession that followed the financial crisis.

Mexican Central Bank Governor Agustin Carstens said on Tuesday evening that the slowdown the economy is experiencing is likely to be temporary, and he predicted that growth would recover to levels around 3 percent next year.

(Additional reporting by Noe Torres and Michael O'Boyle; Editing by Nick Zieminski)

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