Both the wood industry and the embargo-hit food industry had a positive impact on manufacturing in 2014

Year 2014 in manufacturing will not excel on the background of the previous years and the level of output will be close to that of 2013. However, given the current geopolitical situation and the feeble growth in the euro area this outcome can be considered a success.

According to the data of the Central Statistical Bureau (CSB), the manufacturing output in November dropped by 2.0% month-on-month (seasonally adjusted data). Year-on-year, manufacturing contracted by 3.8% in November (calendar adjusted data). Because of the underperformance of manufacturing, a drop was registered also in industrial production both month-on-month (-1.7%) and year-on-year (-0.9%). On the other hand, energy production in November grew rapidly year-on-year (+9.1%), which is related to the colder weather.

The month-on-month drop in manufacturing output in November resulted chiefly from the falling output in the volatile production of beverages, the production of electrical equipment and the two largest sub-branches of manufacturing: food production (-0.9%) and wood industry (-1.0%). Evaluating the situation overall, however, it must be kept in mind, that the output in wood industry and electrical equipment production was at a historical high very recently (in September and October respectively). Moreover, specialists of the wood industry claim that, even though the last months of the year were slightly worse due to the nervousness in the market, the results this year were better than expected.

Year-on-year, November saw contraction in the production of foodstuffs, beverages, basic metals and fabricated metal products as well as in the repairs of machinery and equipment. The manufacturing of computers and electronic products as well as wood processing continued to have the greatest favourable impact on manufacturing.

Even though the manufacturing output in November was lower than in the respective month of 2013, the first 11 months of last year posted an overall manufacturing growth of 0.2%. Alongside the growth in manufacturing of computers and electronic products, these 11 months also saw growth in the output of both largest sub-branches of manufacturing. The previous year has been very successful (+7.8%) for the wood processing industry; and even food production, frequently mentioned in the context of problems in Russia, has been able to demonstrate growth (+2.7%).

The manufacturing turnover in ten months of 2014 remained almost unchanged year-on-year (-0.1%). A 0.3% drop in the export turnover and an unchanged turnover in sales in the domestic market were registered during the period. The greatest drop in export turnover was seen in such Russian market oriented industries as the production of wearing apparel and beverages. The food industry turnover, on the other hand, (like its output) increased in the first ten months of last year both in export (+4.8%) and in the domestic market (+4.2%).

Just as the output and turnover of manufacturing, the level of confidence in the sector, as reported by manufacturer surveys, indicates that last year was by and large similar to the year before: compared to 2013, the industry confidence remained practically unchanged. The average of Latvian ESI (Economic Sentiment Indicator) in the first 11 months of last year was also similar to its average level in 2013.  In the first half of the year, both the ESI and industry confidence were on a downward trend, yet in October and November, an improvement was observed in the ESI data.

The year-end manufacturing PMI (Purchasing Managers’ Index) data are weak in the euro area, and, in the last quarter, they posted the worst result since the current recovery started in Q3 2013. The manufacturing PMI in December in Germany, however, points to resumed growth: after the 17-month low seen in November the index is now edging back into expansion territory – above 50. Outside the euro area, the situation was better: in Poland, the December manufacturing PMI signals growth, concluding a successful final quarter of the year. Even though there was some slowdown toward the end of the year, growth remains solid in the British manufacturing sector and construction sector. Growth in the Russian manufacturing sector, on the other hand, is impeded by the surging inflationary pressures related to the rapidly falling rouble.

Last year, manufacturing faced many challenges. Domestically, problems continued in metal manufacturing, which, in case of resumed production at "KVV Liepājas metalurgs", could turn the sub-branch from the failure of the manufacturing sector into its top performer. The situation in the external markets where more than 60% of the production is sold can be described as negative. If, at the beginning of the year, there was hope that the negative impact of the Russian crisis would be partially compensated by recovery in the euro area, then in the second half of the year, as the situation in Russia failed to improve, the hopes for faster growth in the euro area in 2014 also vanished. Both export and manufacturing data however indicate that Latvian producers are able to not only survive but also grow in challenging circumstances.