Manufacturing grows, yet so does concern about the future

According to the data of the Central Statistical Bureau, the manufacturing output in October grew 0.3% (seasonally adjusted data), with the annual rate of increase at 5.3%. Even thought the monthly increase does not fully compensate for the substantial drop of the previous month, it does not materially change this year’s success story. As predicted before, manufacturing growth this year is likely to reach slightly below the 10% mark.

As we predicted in previous month, the most substantial month-on-month growth in October was observed in the production of chemicals (+73.7%), which is related to the significant drop in volumes because of raw material shortages in September. The situation is similar in the production of other transport vehicles (+49.0%; it mostly concerns the production of railway rolling stock and shipbuilding) – after a substantial drop in September, increase was observed in October. Adjustment in these branches, as well as the substantial growth in the pharmaceuticals sub-branch (+22.0%), were the main contributors to the October increase.

In the majority of sub-branches, production output in October dropped, however. In October, a gradual downslide continued in the production of wood and wood products (-1.2%), which was related to the weak demand in Europe. The amount of production output dropped also in metal production (-6.2%; data very changeable, the trend, for now, is still more upward pointing) and production of construction materials (-6.8%; the signals regarding construction are more negative in the second half of the year). The output volumes likewise dropped in the production of wearing apparel (-4.3%), electrical equipment (-3.9%), equipment and mechanisms (-9.5%), as well as automobiles and trailers (-2.8%).

Moreover, the November industry confidence indicator points to greater shortages of stocks, which could be indicative of two problems. In a classical case, it indicates that demand exceeds supply and thus an increase in industrial output is expected. Yet there is another explanation: Latvian industrialists have vivid memories of the previous crisis when many were left with warehouses full of products without any serious demand for them. It is possible that industrialists, sensing a possible drop in demand in the near future, have reduced their stocks, thus preparing for potential problems in the external markets.

In the first nine months of this year, the manufacturing turnover in actual prices has grown 12.5% year-on-year, including a 6.5% increase in the local market and an 18.5% increase in exports. In a breakdown by sub-branch, the trend is similar: in the majority of sub-branches, the rise in local turnover is substantially behind the export growth rate. Such growth structure yet again points to the importance of the situation in the external markets to Latvian manufacturing, which means that the situation in manufacturing should be assessed in the context of developments in Latvia’s main trading partners.

The data on manufacturing in European countries indicate caution on the part of industrialists. In September, according to the Eurostat operational evaluation, manufacturing in the European Union (EU) overall posted the largest month-on-month drop since January 2009, i.e. since the previous crisis. Moreover, a positive month-on-month growth rate has been observed in just seven of the twenty-seven EU member states. If the monthly data for September are not a one-off technical peculiarity, then, in all likelihood, it implies negative consequences on Latvian manufacturing: Latvia will not find it possible to completely avoid the developments in the European economy. For this reason, we predict a more moderate annual growth rate for manufacturing for the next year, within the 4.0% to 6.0% range, which, in the European context, is still to be considered a very good rate.