World Economy

Oil’s latest casualty: Mexico

"Another disappointing year" looms for Mexico, with growth hit by the rout in the oil price and falling crude production, amid concerns as to the impact of the upcoming U.S. Federal Reserve interest rate hike.

The country will post its second quarter gross domestic product (GDP) figure later on Thursday and will be closely watched especially after the Mexican central bank lowered its growth forecast for 2015 for a fourth time last week, to between 1.7 percent and 2.5 percent.

Susana Gonzalez | Bloomberg via Getty Images

The oil rout has hurt Mexico, whose top export is crude petroleum. Light crude hit a six-and-a-half-year-low on Thursday of $40.21 and a dip below $40 seems possible for the first time since 2009.

"This suggests the economy is on course for another disappointing year as crude production continues to fall and the currency remains under pressure," Wolfango Piccoli, managing director at Teneo Intelligence, said in a research note this week.

Barclays Research forecasts Mexico's economy expanded by a seasonally adjusted 0.9 percent quarter-on-quarter between April and June, with solid growth in the services sector helping offset weaker industrial production.

This would be up from 0.4 percent in the first quarter of 2015 and 0.7 percent in the last three months of 2014, but means Mexico is unlikely to return to the 4 percent-plus annual growth posted between 2010 and 2012.


'Unusual disconnect' between US, Mexico

The U.S. remains by far Mexico's biggest export destination. But despite the close ties, Mexico's economy is lagging its northern neighbor's recovery.

This could prove problematic when the U.S. Fed eventually moves to hike interest rates, as Mexico's central bank has signaled its readiness to move in sync. However, the jury's out on whether the Mexican economy is ready for monetary tightening.

Analysts at Barclays highlight an "unusual disconnect between the U.S. and Mexico's economic cycle," pointing to the waning importance of trade links in recent years.

"While the U.S. continues to import about 80 percent of Mexico's total exports, the relative importance of other economies, such as China, has increased during the past years," said Barclays' Andres Jaime Martinez and Marco Oviedo in a note on Tuesday.

Energy reforms to add 1.5% to GDP?

Energy reforms long-touted by President Enrique Pena Nieto, including the sale of state-owned oil fields, could add up to 1.5 percent to GDP growth in the years ahead, say Barclays analysts.

However, progress has been delayed by the rout in oil prices, disappointing reception of earlier field auctions and corruption allegations that has engulfed the Mexican president.

"The weak performance of the economy adds to the pressures facing President Enrique Pena Nieto, who must now push through an austerity budget for 2016 while attempting to kick-start the energy reform implementation process," said Piccoli.

Oil workers conduct a drill in a petroleum well in Lagunillas at the east coast of Lake Maracaibo near Maracaibo City in Venezuela.
Could the oil slump push this country to default?

—By CNBC's Katy Barnato. Follow her @KatyBarnato.

Clarification: This story has been updated to reflect that Mexico is in North America.