Export boom continues, imports surge too

Latvia's foreign trade data for May indicate that exports have increased by about one third within a year. Consistent with the previous months, the exports of wood contributed most to the annual growth, though the exports of metals and other key commodity groups have also risen notably.

Further growth of exports in May was confirmed both by manufacturing data and the results of business surveys released by the European Commission. However, businesses seemed to be less optimistic in the June surveys, and the financial problems and budget cuts of individual EU governments could possibly have an adverse effect on export demand in the future. The expanded eligibility to export credit guarantees, since July covering also companies exporting to the EU and OECD countries, might become more important.

Improving competitiveness evidenced by the real effective exchange rates and the dynamics of export market shares can support expansion of exports also when external demand is weaker. Yet, it should be taken into account that the positive effect of lower costs can be dampened by shortage of skilled labour - this is an issue already highlighted by producers. Though the annual increase of exports may slow down in the second half of the year both due to the above reasons and the base effect, overall, a two-digit annual export growth rate can be expected.

As to imports, they have surged by about one fourth year-on-year on account of growth in the imports of raw materials (including those needed for manufacturing) and durable goods. The increase of the latter can be explained with households slowly gaining confidence as to their future income.

Tomorrow the Bank of Latvia is going to release information about the current account developments in May, reflecting export-import ratio both for goods and services. In May, in contrast to the previous months, trade deficit in goods was only slightly smaller than in the corresponding period a year ago.