Exports growing as competitiveness and foreign demand indicators improve

An improving competitiveness and growing foreign demand are continuing to be reflected in positive exports developments. Exports on Latvian goods in October grew 7.2% over September. Even though, reflecting the previous contraction, exports in October were 12.7% lower year-on-year, several branches are demonstrating positive annual growth. It is important to note here that the greatest part of the annual nominal exports drop is attributed to price reductions and already since the second quarter the nominal exports improvements are basically determined by the growing real volumes. The real volumes of exports of several groups of food stuffs, mineral products and, in the third quarter, also timber products exceeded the indicators of last year’s corresponding period.

As a result of lower costs domestically, the competitiveness of Latvian producers is improving. That is indicated both by the dynamics of the real effective exchange rate* and by the results of entrepreneur surveys conducted by the European Commission. Moreover, the assessments of entrepreneur competitiveness both in the EU and markets outside the EU have improved most rapidly in the last survey of this year, which points to further improvement. According to the flash estimate, in the third quarter GDP growth resumed in the European Union, which, along with the increased competitiveness of Latvian entrepreneurs is reflected in the number of new export orders that has been growing ever since the second quarter of this year. However, neither in Latvia, nor in the EU at large, the securing of production with orders has not yet increased. That indicates a low proportion of long-term orders as a result of the influence of a harder to predict business environment but could also be related to the cultivation of new markets and new market niches.

If such growth trends are to continue, the real volume of exports may exceed the level of the previous year as early as the fourth quarter of this year. Nominal exports depend also on price dynamics and could reach their annual growth in the first half of 2010. .Import volumes over the last six months have been stabilizing at a level that is almost twice lower than in 2008. However, imports too could grow slightly in the next few quarters if, as a consequence of rising exports, the resumption of import of capital and intermediate consumption goods should counteract a further downslide of consumer goods imports. Such a change in the import structure is obviously a positive sign of economic stabilization. An improved competitiveness coupled with a gradually growing foreign demand is expected to foster export growth in the near future as well, providing a secure basis for a sustainable and balanced economic development.

* The real effective exchange rate of the lats is based on the changes of the lats exchange rate against the main trading partners as well as on inflation developments in Latvia and its trading partners. Note however that the real effective exchange rate is only one of the indicators of competitiveness: competitiveness is determined not only by prices but also by other factors, including quality, brand recognition etc. The trends of the real exchange rate become more pronounced over a longer period of time.