Manufacturing continues to grow but at a slower pace

According to the data of the Central Statistical Bureau, the output of the manufacturing industry in comparative prices grew 2.1% (seasonally adjusted data) month-on-month in September 2011, which means that in the third quarter of 2011 output grew 1.1%. The manufacturing output growth in the first nine months of 2011 was 12.4% year-on-year.

The manufacturing output growth has slowed in the third quarter of 2011 (in the second quarter manufacturing grew 7.5%), which is a reflection of the debt crisis raging in Europe and the impact of the negative mood it has caused. At the moment, however, the development of Latvian manufacturing looks quite respectable against the European backdrop. The industrial confidence indicator evaluated by the European Commission (EC) has only dropped 0.3 points (0.1 points in October) in Latvia over the year, whereas in the European Union at large the drop has been 12.6 points, in Estonia 7.6 points, and in Lithuania 7.5 points. If we are to compare the growth of manufacturing output over the year, Latvia is among the leaders and is likely to stay among the leaders by year-end. The pre-emptive indicators of the EC survey (evaluation of the manufacturing output, employment, orders) currently do not point to a substantial deterioration of industrialist expectations: rather, they are pausing and following the developments in the global economy and the domestic market. It is interesting to note that, judging by the EC survey data, the industrialists claim that the stores of ready-made production at their disposal are too low. That could mean that even in the event of a rapidly falling demand for industrial production, the Latvian producers will not be left with full warehouses and debts to suppliers. The manufacturing branch is thus considerably more ready for demand shocks than it was in 2008. The situation of course differs by branch and individual enterprise.

The EC confidence survey points to a small drop in industrial capacity loads in the fourth quarter of 2011 – 68.2% (68.5% in the third quarter), yet the drop is too small for making any far reaching conclusions. Moreover, the greatest drop is expected in metal production, which could be related not to a drop in production capacity loads but to a more rapid growth of overall capacities in the branch (the new furnace at "Liepājas Metalurgs").

There is no reason for undue euphoria however. The Purchasing Managers index of recent months indicates that in most countries a drop in industrial volumes is to be expected in the coming months, which is evidenced by the  pre-emptive component of PMI indicators, i.e. the evaluation of new orders. The data of the EU confidence surveys indicate that the stores of ready-made production are gradually increasing. Thus, over the last few months, the output of European manufacturing has been on account of momentum. That means that the real drop in industrial volumes in several European countries we are most likely to see in the next few months. Albeit Latvia has lately been posting remarkable results in manufacturing, in the event of global turmoil and demand shocks it will not be able to avoid a drop in activity. Any drop in manufacturing output in the foreign trade partners will first affect those manufacturers that export raw materials, whereas the subsequent, secondary effects will impact other producers as well.