Reuters/Mexico City

Mexico’s annual growth slumped sharply at the start of 2013 to its weakest in three years despite unexpected strength in the services sector, backing expectations of a further interest rate cut later in 2013.

Figures yesterday showed that although Latin America’s second-biggest economy escaped an expected contraction in the first quarter, annual growth dived to its lowest since a deep recession in 2009.

Separate data showed economic activity in March contracted by the most in over three years as well.

Mexico’s economy grew 0.45% in the first quarter compared with the final quarter of last year, the national statistics agency said, outdoing forecasts in a Reuters poll for a 0.05% contraction.

The figure was below a downwardly revised 0.67% growth rate notched the prior quarter.

But growth compared to a year earlier came in at just 0.80%, falling short of expectations for a 1.25% expansion in a Reuters poll and below year-on-year growth in the previous quarter of 3.2%.

Growth was crimped due to economic weakness in the US. Early Easter holidays reduced working days in the first quarter, compared with the year-earlier quarter, since Easter fell in April in 2012.

In addition, Mexican public sector expenditure ebbed, common at the beginning of a new presidential administration.

Mexico’s central bank has already cut benchmark interest rates to a record low 4% and is expected to cut further later this year once a spike in inflation subsides. Slowing growth bolsters the case for lower rates.

“There is a possibility of an interest rate cut, provided it is combined with (the right) monetary conditions ... and that depends on whether the exchange rate continues to appreciate or not,” said Sergio Martin, an economist at HSBC in Mexico City.

Mexico’s peso, which is up more than 4% this year, slipped to a more than three-week low and yields on Mexican interest rate swaps edged down as the market reinforced bets on at least another 25 basis point cut.

The larger-than-expected GDP increase in the first quarter versus the final quarter of last year was driven by strong growth in services such as media and real estate, up 1.48% in the quarter, while activity in the primary sector — encompassing agriculture, forestry and fisheries — fell, adjusting for seasonal factors.

“There is no doubt that ... you are looking at annual growth around 3% if you are an optimist,” said Rafael de la Fuente an economist at UBS in Stamford Connecticut.