By Brendan O'Boyle and Ricardo Figueroa
MEXICO CITY (Reuters) -Analysts sounded alarms over Mexico's economy on Thursday after new data showed feeble growth in the first quarter while inflation spiked outside the central bank's target range for the first time this year.
Gross domestic product (GDP) in Latin America's second-largest economy grew 0.2% in the first quarter from the previous three-month period, statistics agency INEGI said, in line with market forecasts in a Reuters poll and a preliminary estimate released last month.
While agricultural growth offset declines in manufacturing and services, allowing Mexico to avert the technical recession some had feared, the overall economy still indicated weakness.
"Underlying momentum remains fragile and forward-looking indicators suggest a deteriorating outlook," said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.
In annual terms, Mexico's GDP grew 0.8% in the first quarter.
"The data show that during the period, industrial production continued to decline and services weakened," Mexican bank Banamex said.
Economists warn the Mexican economy, strongly intertwined with the United States, remains at risk of contracting in coming quarters due to the uncertainty unleashed by U.S. President Donald Trump's trade policies and tariffs.
"The outlook points to activity remaining weak in the coming quarters," Banamex added.
Separate data showed that Mexico's headline inflation unexpectedly sped up to 4.22% in early May, above the 4.01% forecast of analysts polled by Reuters and outside the central bank's target range of 2-4%.
Consumer prices rose 0.09% in the first 15 days of the month from the previous 15 days, driven in part by a surprise bump in chicken prices, while the less volatile core price index climbed 0.16% in early May, coming it at 3.97% on an annual basis.
The Bank of Mexico cited weak economic activity in its decision last week to cut Mexico's benchmark interest rate by 50 basis points, its third straight cut of that magnitude, bringing it to 8.5%, the lowest since August 2022.
Despite the jump in inflation, analysts at Actinver, Pantheon and Capital Economics all see Mexico's central bank cutting its rate again at its June monetary policy meeting.
"The central bank once again sounded very dovish at its meeting last week and has made very clear that it's increasingly worried about the growth outlook," Capital Economics' Kimberley Sperrfechter said.
Although growth is not part of the central bank's mandate, a weaker outlook is seen adding pressure on the governing board to continue reducing borrowing costs.
Speaking alongside President Claudia Sheinbaum on Thursday, Finance Minister Edgar Amador said the GDP figures showed "solid performance and a continued expansion of the economy."
Amador's ministry has a more upbeat forecast for Mexico's economy than private sector analysts. A draft budget from the finance ministry last month forecast the economy growing between 1.5% and 2.3% this year.
A central bank survey of private sector economists published on May 2 had a median growth forecast of just 0.2% this year.
"The Mexican economy is going well," Sheinbaum said on Thursday. "It is not necessary to change the model."