Mexico Plunges Into Recession in 2nd Quarter : Economies: GDP for period shrinks 10.5%, far more than government had predicted.

Mexico’s economy officially plunged into recession in the second quarter, with a downturn far deeper than the government had previously predicted, according to government reports.

A startling report issued late Tuesday by the Finance Ministry showed that the second-quarter gross domestic product shrank 10.5%, considerably more than the 6% that Finance Minister Guillermo Ortiz had predicted two weeks ago.

That drop, combined with a 0.6% decline in the first quarter, thrust Mexico into its first recession since 1986-87, a downturn triggered by a stock market crash. Mexico also suffered a recession in 1982-83 at the height of its debt crisis.

The latest recession is the aftermath of a nearly 40% devaluation of the peso that was triggered by an economic crisis last December. A recession is defined as two consecutive quarters of negative growth.

In another indication of economic weakness, the Bank of Mexico reported Wednesday that foreign reserves fell 2.7% to $12.91 billion, a drop blamed on repayment of dollar-indexed bonds and other debt payments.

However, Mexican currency and stock markets declined only slightly on the Finance Ministry report, apparently because investors believe administration assurances that the worst of the economic crisis is over.

The widely watched Bolsa index fell only 20 points, or 0.8%, while the peso lost just 2 centavos, closing at 6.17 to the dollar--its lowest level since early July.

The Finance Ministry report contained some bright spots. It indicated that unemployment appeared to be leveling off in June, after more than 1 million people lost their jobs during the first five months of the year, according to Labor Ministry estimates.

Also, the report said, inflation has slowed. And growth has resumed in a few industries, notably basic metals, and Mexico has developed a $3.88-billion trade surplus.

“These figures show that once the initial economic adjustment is overcome, the rate of economic decrease has begun to diminish significantly,” the report said. “This reflects a gradual stabilization process that could become a turnaround in the second half.”

The report also argues that the basis of comparison--the second quarter of last year--was an exceptionally high-growth period. The report does not mention that it was the quarter just before the 1994 presidential election.

Election-year politics are partly blamed for the current crisis. Mexico had depended on foreign investment to fuel its economy and to counterbalance the trade deficit. However, indications of instability following two major political assassinations provoked capital flight.

As dollars flowed out of Mexico, foreign reserves dwindled, forcing the government to devalue the peso. Since then, the peso has lost 44% of its value.

To confront the crisis, the government was forced to borrow heavily from international lenders, including the U.S. government. Those lenders insisted on tight fiscal and monetary policies, designed to prevent an inflationary spiral, that have plunged the economy into recession.