Industry continued to grow rapidly, a slower rate expected in the next months

The manufacturing industry output in August grew 2.6% month-on-month (seasonally adjusted data), and year-on-year the growth has reached 20.4% (data adjusted to the number of working days), as indicated by the data published by the Central Statistical Agency (CSP). The increase was primarily contributed by the rise in the output of metal, chemical, non-metallic mineral, as well as wood pulp and wood product industries. The output of the mining industry hardly changed at all month-on-month, posting an 11.2% year-on-year growth. In the electrical power and water supply industry the growth was 8.5% month-on-month and 23.8% year-on-year.

The volume of new orders in July increased 67.0% year-on-year (41.9% domestically, 74.8% in exports), but remained practically unchanged month-on-month according to the seasonally adjusted data. Moreover, the number of new orders for the export market, which previously was one of the driving forces behind industrial production growth, went down for the first time since January. In September, the industrial confidence indicator dropped 0.2 percentage points and the industrialist outlook on the next few months' output 1.7 percentage points.

Even though the manufacturing industry has grown in the last few months, the growth rate is expected to drop at the end of the year. This will be because of a combination of factors. First, uncertainty regarding the prospects of global economic development is on the rise, finding its reflection in the dynamics of new export orders. Growth in the EU countries remains stable, but the budget consolidation measures they are taking may reduce demand in these countries in 2011, which can have a negative effect on Latvian industrial production and exports. Second, with the rise in production volumes, the full load of industrial production capacity has also grown. This means that the opportunities for raising production will in the future increasingly depend on new investments and on the ability of businesses to finance these investments by attracting credit resources.

Third, it is not only productivity that accounts for the recent Latvian industrial growth but also price competitiveness. The situation in the labour market has helped to reduce the costs of per unit production, which was a substantial boost for the competitiveness of Latvian manufacturing industry vis-à-vis the manufacturers of other countries. Even though cutting labour costs was vitally necessary to reduce the gap opened in previous years between the growth of wages and productivity, it is clear that to base increased competitiveness on reduced labour costs in the conditions of the open EU labour market is not a solution for the long term. A sustainable increase in welfare can only be ensured by production that is wiser, more effective and generating larger income. That means that producers will have to continue to improve the efficiency of their businesses and develop new knowledge-based products that will require new investments both in the production technologies and man-capital.  For such a course to take hold, relevant government policies, especially in education, will also have to be in place.

As far as growth numbers are concerned, the rate of annual industrial growth will begin to slow down at the end of the year because of the so-called base effect, i.e. it was the months of the third quarter that in 2009 were the lowest point in manufacturing output volumes. Since then industrial production has been growing evenly, therefore the base effect will become smaller as of the last quarter of this year.