Mexico's economy will grow 3.4 percent in 2014, thanks to improvement in consumer demand, stronger exports and the increase in spending approved by Congress, BBVA Bancomer said in a report.

The gross domestic product (GDP) will expand this year after decelerating in 2013, the unit of Spanish banking giant BBVA said in its Situacion Mexico report.

The expectations for stronger growth are based on "greater external demand as a result of the recovery in the United States, higher approved public spending and an improvement in consumer spending," BBVA Bancomer, which estimates that Mexico's economy grew by just 1.2 percent in 2013, said.

"External demand appears to boost Mexican manufacturing," the bank said.

Mexico's public sector will go from posting a deficit of 0.40 percent of GDP in 2013 to one of 1.5 percent of GDP in 2014, excluding investment by state-owned oil giant Pemex, a "positive" element because it will bolster infrastructure and social security spending, BBVA said.

Higher government spending will provide "countercyclical stimulus to the economy, so that the balanced budget returns in 2017, ensuring fiscal stability," BBVA Bancomer said.

The reforms implemented in 2013 will help "improve the Mexican economy's competitiveness, both via development and the approval of secondary laws" in other sectors, the bank said.

The inflationary spike registered in January due to the effects of the tax reforms on prices is temporary and unlikely to lead to a general increase in prices, the bank said.

"It is expected that annual inflation will average 4.3 percent in 2014," with the exchange rate at around 12.90 pesos per dollar as global risk aversion falls and monetary stimulus continues to be tapered in the United States, BBVA Bancomer said. EFE