(Bloomberg) -- Mexico’s economy expanded at a slightly slower pace than the preliminary estimate in the first quarter, while still benefiting from strong remittance flows and record exports to the US.

Gross domestic product expanded 1% in the first quarter from the previous three months, according to the revised figure released by Mexico’s national statistics institute on Friday. That compares with the 1.0% estimate from economists surveyed by Bloomberg and the 1.1% preliminary reading reported last month. 

From the same period a year ago, GDP rose 3.7%, below the 3.9% first reading, as sustained domestic consumption and foreign demand continue to boost growth. 

In the near-term, Latin America’s second-biggest economy may soon have to contend with an economic slowdown in the US — the No. 1 buyer of Mexico’s goods — which would weigh on exports, cash flows sent home from abroad and tourism.

“Mexico’s economic activity in 1Q was strong, but it shows an important deceleration at the margin,” said Carlos Capistran, chief Mexico and Canada economist for BofA Securities Inc, adding that he sees a GDP contraction as soon as the third quarter. “Going forward we continue to expect the economy to decelerate, specially as exports and remittances slow down with US activity.”

Quarterly Details

In the first quarter, in comparison to the same period the prior year, the agriculture sector grew 2.3%, the manufacturing sector 2.5% and the services sector 4.3%. On a quarterly basis, with seasonal adjustment, agriculture shrank 2.8%, manufacturing grew 0.6%, and services expanded 1.5%.

Businesses’ investment in machinery, a recovery of the services sector after it plunged earlier during the pandemic and firm consumption despite high borrowing costs point to the economy’s strength. 

The economy has now posted six straight quarters of growth, the longest run under President Andres Manuel Lopez Obrador, underscoring its resilience and the sustained demand for goods produced in Mexico’s manufacturing centers.

While a so-called soft landing for the US can’t be fully discounted, most analysts anticipate at least a mild contraction in the wake of the US Federal Reserve’s sharpest interest rate tightening campaign in decades. Any significant spending cuts stemming from a US debt limit deal adds downside risk to growth for the US and, by extension, Mexico.

US demand was responsible for almost 80% of Mexico’s $53.6 billion worth of exports in March — the highest monthly total in the series that goes back to 1985 — though data came in below expectations in April. The weakness in manufacturing exports, especially of autos, was responsible for the sub-par reading, according to Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc.

In Mexico itself, ever-rising flows of cash sent home by citizens working abroad has become a key support for the economy. Full-year remittances hit a record $58.5 billion in 2022, of which almost $56 billion came from the US, and in the 12 months through March they reached $59.9 billion.

Rate Cuts

Looking forward, slowing inflation and the end of the central bank’s record tightening cycle will be supportive to domestic demand. Earlier this month, the central bank, known as Banxico, held its key rate at an all-time high of 11.25% after hiking 725 basis points over two years. 

In the statement accompanying that decision, the board said it would maintain the rate for a “prolonged period.” Economists are divided about whether the bank will cut borrowing costs this year or wait until 2024.

Economists in a Citibanamex survey published this week held their 2023 growth forecast at 1.90%, up from 1% in early February. They also forecast that the central bank’s key rate would be 11.25% at year-end. 

--With assistance from Rafael Gayol.

(Update with economist comments, analysis and sector growth starting in fifth paragraph.)

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