By Juan Montes 

MEXICO CITY -- Mexico's economy slowed down a bit in the fourth quarter, broadly in line with expectations, as domestic demand appeared to suffer from the economic uncertainty caused by the U.S. election last November.

Gross domestic product expanded by a seasonally adjusted 0.7% in the October-December period, down from 1.1% in the third quarter, the national statistics agency said Wednesday. That translates into an annualized growth rate of 2.8%.

Services, a key supporter of growth in recent years, ran out of some steam in the fourth quarter, and the industrial sector remained stagnant. Oil and mining output shrank, while manufacturing exports showed resilience amid a difficult external backdrop.

In 2016 as a whole, the economy grew 2.3%, below the previous year and less than what the government had initially expected at the beginning of the year.

In the first four years of President Enrique Peña Nieto's administration, the annual average growth has been 2.1% -- a disappointing result that is far from the 5% growth target promised by Mr. Peña Nieto.

For this year, the economic outlook is even gloomier. Economists expect Mexico's economy to slow down further and expand by around 1.6%, the lowest pace of growth since 2013, as higher inflation and rising interest rates will likely dent households consumption.

The uncertainty around the trade policies of U.S. President Donald Trump, who is willing to renegotiate the North American Free Trade Agreement in the coming months, has also clouded the outlook for foreign investments and led the peso to historic lows, which is pressuring inflation by making imports more expensive.

Meanwhile, the market-friendly economic reforms driven by Mr. Peña Nieto in his first two years in office, such as the opening of the oil and telecom industries to more competition, have borne some fruit, but have yet to translate into more growth.

The Bank of Mexico raised rates four times since September to support the peso and contain inflation. The economic slowdown is unlikely to deter the central bank from raising rates further this year, as inflation is expected to raise beyond 5% -- well above the 3% target -- and the U.S. Federal Reserve is on a rate-raising track.

During the fourth quarter, Mexico's economy suffered from a slowdown in the services sector, which expanded 0.8% -- still healthy growth but well below the previous quarter.

A bright spot was manufacturing activity, which accounts for around 18% of Mexico's total GDP. Manufacturing grew at a strong 1.1% in the period, a positive performance considering Mexico's export model is under threat from Mr. Trump's protectionist rhetoric.

Oil and mining output shrank 3% in the quarter. Crude oil production plummeted 10% or 220,000 barrels a day in 2016, dragging into recession several oil states such as Campeche and Tabasco, in the Gulf of Mexico's southern coast.

Write to Juan Montes at juan.montes@wsj.com

(END) Dow Jones Newswires

February 22, 2017 09:57 ET (14:57 GMT)