Manufacturing in Latvia continues growing under conditions of global instability

The manufacturing output in June grew 3.8% month-on-month (seasonally adjusted data). The annual growth was at 17.5%. Thus in June 2011 the manufacturing output, according to seasonally adjusted data, was close to the pre-crisis maximum. In the second quarter of 2011, the manufacturing output grew  7.6% quarter-on-quarter, is a very rapid increase.

The growth of the first six months over the same period in 2010 was registered in such industries as the production of timber (+14.4%), ready-made metal products (+36.1%), furniture (+9.0%), non-metal mineral products (+34.9%), clothing (+48.9%), as well as computers, electrical and optical equipment (+19.3%). A drop has been registered in the production of beverages (-2.8%), chemical substances (-4.1%), and paper and paper products (-2.0%).

Overall, the manufacturing data for the first six months are very positive, yet one should be more cautious when evaluating the future prospects for the industry. The majority of operational and preliminary indicators point to a possible deterioration of the situation in manufacturing. The business confidence indicator collected by the European Commission (EU) improved only in July for the first time in the last five months, yet the majority of preliminary indicators (the expected output, employment expectations etc.) point to a possible drop in industrial production in the coming months. The index of new orders in manufacturing has also been dropping for four consecutive months and particularly rapidly in the export markets.

Global developments should be watched particularly closely. Most European countries are subject to risks related to the possible consequences of the debt crisis. U.S. Government, to limit a further growth of the debt, has announced its resolve to show more frugality. The economy of Asia is also beginning to show signs of an economic downturn. Thus most economic indicators point to a slackening of global economy. The EC business confidence indicator in the European Union dropped 2.6 points in the European Union in July, with the volume of future orders dropping particularly rapidly. The July PMI indicator also dropped notably not only in the euro area but also in the United Kingdom, China, and the United States.  Taking into account the fact that the above preliminary indicators usually are accurate in predicting the fluctuations of real economy, in the second half of 2011, the industrial growth in the world will diminish, which can have a detrimental effect on the Latvian industry, particularly those enterprises that export raw materials (i.e. timber, metals).

The good news brought by the statistics of recent months is that the turnover of industrial production is gradually increasing in the domestic market. The dynamics of new orders is also growing more rapidly for production intended for the domestic market. Yet it must be noted that domestic consumption is not capable of carrying manufacturing and a deterioration of manufacturing output indicators is to be expected.

The weak economic development in most of the countries is to Latvia’s advantage from the point of view of investment. Investors are actively seeking opportunities for alternative investment and the potential of Latvian manufacturing is still rather attractive. In order to attract more such investment, a flow of encouraging communication intended for potential investors is most important. Investors expect both a continuation of the macroeconomic stabilization programme as the political entanglement is settled and assurances that the balancing of the 2012 budget will take place by cutting costs instead of raising taxes. Clear rules of the game may help us turn the current negative global trends into positive ones for our economy.

Figure 1. Dynamics of manufacturing industries

Figure 2. Growth of manufacturing industries in the first six months of 2011 compared to the same period in 2010 (calendar adjusted data)