A disappointing start to the year in manufacturing

Data for industrial growth in the first month of the year was encouraging. It was determined by the surge in energy industry output, which, in all likelihood will be short-lived. However, developments in manufacturing can be described as weak at best. Both in month-on-month and year-on-year terms the sector posted substantially worse results. Indices characterizing industrial growth in partner countries also point to meagre growth this year.

According to the data of the Central Statistical Bureau (CSB), the amount of manufacturing output in January 2016 dropped both in month-on-month and year-on-year terms (by 3.2%, sa, and 2.9%, ca respectively). However, owing to the cold weather and thus the very impressive growth in energy sector output, year-on-year overall industrial growth was positive. The January energy industry growth is likely to be short-lived, whereas the weak results in manufacturing seem to be a sign of very modest future growth in the branch.

The overall situation in manufacturing is not very heartening: the two largest branches - food and wood processing - had a negative impact on the month-on-month manufacturing output. Food industry output also continued to fall in year-on-year terms. This was mostly due to the ongoing problems in fish processing (a 32% drop year-on-year), for in the dairy product manufacturing year-on-year growth has been observed since August of last year (a 7.0% growth in January). There is some hope for a change in the negative pattern observed in fish processing. For instance the canned fish producer "Karavela", one of the biggest players in this sub-branch, plans to begin selling its products in U.S. retail chains and is working on securing the right to produce private label products for one on the largest retail networks in Germany.  

Even though a month-on-month drop was registered in wood processing in January, the year-on-year growth rate remained in the positive territory since only last month a new output record was reached in this sub-branch. Both month-on-month and year-on-year, output dropped in the production of computers and electronic and optical equipment – one of the branches that have recently upheld manufacturing growth.  On the positive side, output in January was on the rise in the manufacturing of fabricated metal products, construction materials and also in a branch that has suffered considerably due to the problems in Russia – textile production. The growth registered in the production of construction materials is a surprise, for the development of the construction market both in Latvia and its partner countries has been weak.

CSB has begun to publish turnover data for manufacturing (sales, with price impact not excluded) concurrently with output data. Overall, turnover was slightly up compared to December (+0.5%), whereas a drop was registered year-on-year (-1.0%). In January of this year, last year's trend continued: export turnover grew while the turnover in the local market contracted. The share of manufacturing sold in export market in 2015 exceeded that of 2012: export turnover has reached 63.9% of total turnover. The branches that have fostered this growth are wood processing (currently already exports 74.7% of production) and manufacturing of machinery and equipment n.e.c.  (83.8%). Albeit previously an upward trend was observed, the share of export in total sales of food industry dropped for the second consecutive year (34.2%) – export turnover fell faster than that in the local market. The greatest negative contributor was the drop in dairy product turnover in export, which can be linked to the Russian import ban. However, the sector's companies are actively pursuing new markets – for instance, "Latvijas Piens" this year sent the first shipments of its products to Saudi Arabia and Israel.

The year has begun poorly in manufacturing, but we are not the only ones experiencing difficulties: our export partners too experience some slowdown in industrial production. Manufacturing PMI in the euro area dropped to a 12-month low, while still hovering above the neutral 50 mark - industry  is growing, albeit slowly. In Germany, too, the PMI is slightly above 50, yet at its 15-month low. The trend to which these indicators point coincides with the forecasts of the European Commission regarding the euro area growth in 2016: it will continue to be slow. In the United Kingdom, the manufacturing PMI in February was only slightly above 50 - a 34-month low. Problems continue in the Russian manufacturing sector: even though after the poor results throughout 2015, PMI rose slightly above 50 at the end of the year, pointing to growth, currently the indicator once again signals a drop in the output of the sector. The only positive news comes from Poland: manufacturing PMI rose to the highest level in seven months after the relatively weak result in January.