Manufacturing holds more surprises

According to the data of the Central Statistical Bureau, the output of manufacturing in November 2012 grew 3.5% (seasonally adjusted data). The annual growth rate in November 2012 was thus 7.9%. Such an increase at the end of the year once again testifies to the ability of Latvian manufacturers to surprise – despite unfavourable developments in the external markets, manufacturing has demonstrated substantial growth.

A substantial contribution to the month-on-month growth in manufacturing was the 4.7% increase in the wood and wood product volumes, the 6.0% increase in metal production and the 8.8% one in fabricated metal products as well as the 19.7% increase in construction materials manufacturing. If the fluctuations in both metals production sub-branches are quite common, the revival in wood and wood product manufacturing in November was rather unexpected. The rise in construction material production volumes is also somewhat baffling, given the weak confidence indicators in the branch at the end of the year.

Further development in manufacturing will be determined by several factors. A gradual rise in domestic demand is expected, primarily affecting those branches of manufacturing whose main market is the domestic one: the production of foodstuffs and beverages, construction materials, rubber and plastic products. It should be kept in mind, however, that the sales of manufacturing products in the domestic market account for only one third (37.4% in the third quarter of 2012) of the total manufacturing product sales. The rest of the manufacturing turnover is on account of exports, which determine the success or lack thereof of the branch at large.

As regards external demand, two things should be kept in mind: the overall economic conditions and the demand and supply conditions specific to each sub-branch of manufacturing. As far as the overall economic situation at the beginning of 2013 is concerned, small positive developments deserve mention. First, the uncertainty related to the fiscal situation of the United States has dissipated at least in part. Second, the latest Purchasing Managers Indexes point to a slight improvement in most of the Asian countries as well as the United States, Mexico, Brazil and Canada. On the other hand, even though Latvian manufacturers have expanded their markets in recent years, Europe is still the market that has the greatest impact on us and European indicators have yet to point to any improvement in the situation. The PMI indicators for most of European countries remain unfavourable.

In a breakdown by sub-branch, a variable situation emerges in Latvian manufacturing. In the near future, the wood industry will face its greatest challenge in a lack of raw materials because of the unfavourable situation with the owners of private forests.  Growth in construction materials manufacturing will probably be limited by the drop in the growth rate in construction. The limitations in metal and metal products manufacturing will come mostly from the situation in the external markets: the European construction and automobile markets do not show any significant signs of recovery.  The growth potential in textile product and wearing apparel manufacturing is challenged by the lacking labour force in the branch. The output of chemical production will depend on developments in the production of biofuel: whether or not the latter can survive without direct support from the state.  

Overall, the output of manufacturing in 2012 can be expected to have increased by 10%. In 2013, the annual growth rate will fall substantially both because of the high volumes reached in   2012 and because of the various limiting factors mentioned above. We expect manufacturing in 2013 to grow 4-6%, with the situation radically different branch by branch.

It should be noted, however, that in previous years manufacturing has managed to surprise with better results than expected. Now, at the beginning stages of sales, there are several investment projects that theoretically could increase the total output of the branch, diversifying it even more.  It will therefore not be very surprising if at the end of 2013 the results achieved in manufacturing will have exceeded our current predictions.