After a slowdown in January, manufacturing growth regains momentum

According to the information provided by the Central Statistical Bureau of Latvia (CSB), in February manufacturing output, at constant prices, grew by 4.2% month-on-month (seasonally adjusted data). The volume of output has also risen by 4.3% in annual terms according to calendar adjusted data. The atypically negative data for January suggested that the monthly performance results could be positive in February. Looking at the monthly data for subsectors, no clear signal indicating the cause of such a marked decline emerged (possibly, any of the subsectors for which data have not been provided).

The positive growth of wood industry (+11.2%; already traditionally, a new all-time-high output of the subsector) and the recovery of the manufacture of fabricated metal products (+10.0% – also one of the best months in the history) led to positive annual changes in February. Meanwhile, in February the negative contribution to annual changes in the sector came from the manufacture of electrical equipment (–6.4%), wearing apparel (–2.3%), chemical substances (–1.9%) and particularly the repair and installation of equipment (–21.0%; the sector's output was related to the installation and repair of equipment as well as the repair of ships). It is likewise worth emphasising the sound performance of food industry, reporting increases in output (4.3%) and annual changes (5.2%) during the month, and this has been the best result of the sector since 2014. To conclude, there are currently different signals regarding the subsectors. The dynamics of annual and monthly changes also varies.

In February, the annual rate of change (+2.0%) recorded by the energy sector climbed down considerably from the highs seen in January (31.7%). Air temperature differences were insignificant in February in comparison with the previous year and thereby the amount of energy produced by thermoelectric power plants was not so notable, though it was offset by a higher generating capacity of hydroelectric stations. At the same time, monthly changes (seasonally adjusted data) were strongly negative (–10.7%) in February due to the atypically warm February, if viewed from a historical perspective.

The industrial confidence indicator aggregated by the European Commission has been quite stable for the past two years, merely fluctuating within a narrow range. The above confidence indicator has remained approximately at the previous level also in the first quarter of 2016. Although currently it is premature to speak about any marked trend, a slightly positive signal has emerged in March of 2016 – the assessment of order volume has improved substantially. The situation in the sector over the past two years, namely the stagnation of output growth, is well mirrored by the present dynamics of confidence indicator.

The resumed operation and idle time of JSC KVV Liepājas metalurgs notwithstanding, the growth of other subsectors of manufacturing has been rather limited and is actually attributable solely to the development of two subsectors: wood industry and the manufacture of computer, electronic and optical products.

Further successes or failures of manufacturing will certainly depend to a large extent on the economic growth outside Latvia since almost two thirds of the sector's output are exported (63.9% in 2015). In this regard, implicitly positive turning point has not been observed so far: growth data and forecasts of the euro area countries are modest, while Brazil, Russia and certainly China encounter problems in the global context. Political decisions will also play a role. For instance, the performance of some manufacturing subsectors (food industry in particular) will depend on the extension or elimination of sanctions against Russia. Taking into consideration the fact that the idle time of JSC KVV Liepājas metalurgs has been a negative contributor to the annual changes since March and given the global situation on the metals market (both the demand and prices), the launch of its full-fledged operation is highly unlikely in 2016. The output growth of the sector is most likely to be quite modest this year.