An employee works at an NPD Technology factory that assembles printed circuit boards (PCBs) for export to the United States, in Ciudad Juarez, Mexico, July 31, 2025. REUTERS/Jose Luis Gonzalez

MEXICO CITY (Reuters) -Mexico's economy contracted 0.3% in the third quarter from the previous three-month period, preliminary data showed on Thursday, marking its first year-on-year quarterly decline since 2021 and raising prospects its central bank will press ahead with a fresh interest rate cut next week.

Mainly impacted by a slowdown in industrial activity, Latin America's second-largest economy broke two consecutive quarters of gross domestic product growth, though data from the national statistics agency INEGI was in line with forecasts from economists polled by Reuters.

Secondary or manufacturing activities were down 1.5% on a sequential basis, the data showed, offsetting growth of 3.2% in the economy's primary sector, which includes farming, fishing and mining. Services, meanwhile, expanded 0.1%.

The data was released ahead of the Bank of Mexico's November 6 monetary policy decision. Policymakers last month cut borrowing costs to their lowest level since May 2022 and indicated they would consider further easing.

Concerns over global trade tensions and sluggish economic growth have weighed on recent decisions by the central bank, also known as Banxico.

Kimberley Sperrfechter, an emerging markets economist at Capital Economics, said the GDP contraction and a dip in inflation in early October make it likely the central bank will cut its key interest rate by 25 basis points to 7.25% next week.

"With the economy likely to remain relatively weak and inflation set to remain within the target range, we think that Banxico will cut its policy rate to a below-consensus 6.25% by the end of next year," she added.

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, when global economic activity was still reeling from the pandemic.

Economists at Banamex said they expect a moderate economic recovery in coming quarters, but warned about "high uncertainty due to both external and internal factors." They forecast GDP to grow 0.4% this year and 1.5% in 2026.

(Reporting by Ricardo Figueroa and Gabriel Araujo; Additional reporting by Natalia Siniawski; Editing by Alison Williams, Bernadette Baum and Paul Simao)