Mexico gov't sees economy improving after Q3 contraction

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Finance minister confident in Q4 pick-up

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Q3 marked first year-on-year contraction since 2021

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Ministry hikes year-end inflation forecasts

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2025 GDP growth, public debt forecasts maintained

By Ana Isabel Martinez

MEXICO CITY, Oct 30 (Reuters) - Mexico's finance ministry predicted on Thursday that Latin America's No. 2 economy will likely improve in the last three months of this year following a third-quarter contraction, and hiked its inflation estimate for the end of 2025. Inflation will likely end this year at 4.2%, versus a prior estimate of 3.8%, the ministry said in a quarterly report.

Finance Minister Edgar Amador presented the report of the government's finances hours after preliminary data showed a 0.3% contraction in GDP for the three months ended September versus three months earlier. The data raised prospects Mexico's central bank will cut interest rates next week.

Compared with the same period a year earlier, the Mexican economy shrank 0.2% in the third quarter, the first year-on-year contraction since early 2021. Amador said the contraction was concentrated in the industrial sector, which fell 1.5% in the period. It was dragged by manufacturing which suffered due to U.S. President Donald Trump's trade policies.

The North American free trade pact has spared many Mexican industries the brunt of U.S. tariffs, but this agreement is up for review next year.

"The general economy continues to show relatively good progress," Amador said. "There is not a generalized weakness in the economy, nor is there a prolonged weakness." Amador said he was confident the economy would improve as the year comes to a close, noting good labor market conditions with average real-term wage increases, and maintained forecasts issued in last month's 2026 budget report.

Better wages, profits and returns had contributed to a 7% annual real-term increase in tax collection during the third quarter, he added, boosting public finances.

The finance ministry said economic growth and fiscal debt would likely end this year in line with forecasts issued in the government's recent budget, estimating GDP growth at 0.5% to 1.5%, and a fiscal deficit at 4.3% to 4.4% of GDP.

Regarding heavily-indebted state oil firm Pemex, the ministry said a 254 billion peso capitalization would not affect the fiscal deficit, and that it planned to maintain a strategy of supporting the company. Most of this money would go toward operations intended to reduce debt, such as bond buybacks, it added. Pemex's financial debt is expected to close this year at $84 billion, the ministry said, down from $100 billion in the ministry's last report.

Public debt for the end of September stood at 49.9% of GDP, Amador said, compared to 49.5% reported for the end of June and 51.3% at the end of 2024. (Reporting by Ana Isabel Martinez; Additional reporting by Ricardo Figueroa and Gabriel Araujo; Writing by Sarah Morland; Editing by Natalia Siniawski and David Gregorio)