Manufacturing begins year with growth, yet no reason for great optimism

In January the manufacturing production volumes grew 3.0% month-on-month (Central Statistical Bureau data, seasonally adjusted). Compared to January 2011, the manufacturing production volumes have increased by 16.8% (calendar-adjusted data).

The contributors to this growth were the wearing apparel branch, where the production volumes grew 9.4% over a month, pharmaceutics (+15.8%), basic metal production (+10.2%), manufacturing of fabricated metal products (+10.2%), as well as manufacturing of other transport equipment (+46.6%). On the other hand, the production volumes dropped in January in the food industry – par 1.4% and manufacturing of electrical equipment – by 15.1%. The colder temperatures and snowy conditions in January ensured increases in production volumes of electricity, gas, steam and air conditioning supply branche (+3.6%), while causing drops in mining and quarrying (-5.4%).

The industry confidence index aggregated by the European Commission has been hovering slightly below zero for months but is not dropping further. In the last two months, the outlook of Latvian industrialists on the amounts of past output has improved in contrast to their outlook regarding new orders in the coming months, new export orders and the number of people employed. That could be an indication that a fluctuating manufacturing dynamic is expected to continue in the coming months, yet without substantial drops or rises.

At the same time, according to the European Commission's business survey, the evaluation of the output volumes expected in the future as well as the evaluation of selling prices continue to improve. The evaluation of expected output volumes for the next three months has substantially improved in the food production industry (which is mostly oriented to the domestic market) and fabricated metal products manufacturing, yet deteriorating slightly in the manufacturing of wood and wood products. The evaluation of expected sales prices is improving in the textile industry (because of the appreciation of raw materials) and manufacturing of non-metallic minerals (construction materials), yet deteriorating in the manufacturing of wood and wood products as well as manufacturing of fabricated metal products.

The evaluation of stock level is slightly worrisome – it has grown to a 32-month high, which could indicate a gradual drop of production sales volumes. Yet it has to be kept in mind that the situation regarding stock amounts in the sub-branches of manufacturing is very uneven. According to the evaluation by businesses, the largest stocks have formed in the production of wood and wood products as well as pharmaceutics, whereas a lack of stocks has been observed in the manufacturing of textile products, chemicals and fabricated metal products.

In 2011 overall the turnover of manufacturing rose 16.8%, including 20.6% in exports and 13.3% in the domestic market. It is another indication that the manufacturing growth in 2011 was based on a substantial rise of turnover in the external markets. In recent months there has been some fluctuation in these data, however: a month-on-month drop was observed in the December manufacturing turnover for the first time in ten months.  In the context of the problems experienced by the euro area, the manufacturing export market will grow more moderately this year. On the other hand, a small rise in domestic market volumes is possible, fostered by the gradually growing real income by households.

There is no room for much optimism, however. Albeit the Purchasing Managers Index and confidence indicators have somewhat improved in Europe in January and February, they are still very low indicating substantial problems in the economic situation. In 2012 – or at least at the beginning of the year, the manufacturing dynamics is most likely to fluctuate more than last year. Large differences are also possible in breakdown by sub-branches; the demand for the production of each sub-branch is determined by different factors.

Manufacturing dynamics