Manufacturing growth slows down; investment to play a crucial role in further development

Compared to October, the output of the manufacturing industry shrunk a little, i.e. by 0.6% (seasonally adjusted data), in November 2010. Such a development was already predicted by the confidence indicators published by the European Commission and the future assessment by businessmen. The industrial confidence indicator dropped 0.3 percentage points month-on-month, with the estimate of export orders dropping substantially, i.e. 3.5 percentage points.

The monthly drop was primarily accounted for by diminished production volumes of wood pulp items, cars, trailers and semi-trailers as well as chemicals. Growth was the greatest in the production of construction materials. The annual growth in manufacturing remained rather high: year-on-year it amounted to 12.4% (data adjusted to the number of working days). Because of the base effect, however, the growth rate was only half that of October. Over the year, production volumes have increased in almost all sectors, with the production of construction materials, computers, electronic and optical products, electrical equipment as well as cars, trailers and semi-trailers growing the fastest.

Confidence indicators permit us to predict that the data for December 2010 will indicate a small monthly growth: entrepreneur optimism was on the rise in November as they positively assessed the activity expected in a month as well as the subsequent level of capacity use. In manufacturing in 2011 growth is expected to continue, though the rate of growth will be more moderate. The external demand is expected to develop slower than this year and, as the load of production capacities increases, further development will be increasingly dependent on new investment in Latvia's businesses.

With a heavier burden of taxes, a rapid growth of domestic demand can hardly be predicted. In some sectors, growth could slow down or even halt at the rather high level of 2010, e.g., in the production of wood pulp items, electrical equipment and chemicals. Food production is also not likely to grow rapidly, since most of its output is sold domestically. A more rapid rate of growth can be expected in mechanical engineering as well as pharmaceutical and electronic industries. The lack of qualified labour force deserves mention as the factor that may increasingly limit production in several industries. Along with the increased tax burden it may gradually build up pressure on business expenditures and competitiveness of production abroad.

As to a positive mood of investors, on which any increased financing and new investments in industrial development depend, there is a need for clear medium-term tax policies as well as an improvement in Latvia's international ratings.