Manufacturing output expands for the third consecutive month

According to the data of the Central Statistical Bureau, the volume of output in manufacturing grew by 1.2% (at constant prices, seasonally adjusted) in June. After a short break, the annual growth rate turned again positive (0.8%). In the second quarter of 2013, the volume of output in manufacturing posted a quarter-on-quarter increase of 1.0%, while year-on-year it recorded a decrease of 0.6%, which means that manufacturing will most likely account for a negative contribution to the annual growth of the GDP.

In the second quarter, the quarterly expansion of manufacturing output was a small surprise to economic analysts. In fact, already at the moment when the public got to know about the problems of the JSC Liepājas metalurgs, it was clear that manufacturing indicators would go down substantially. However, despite the problems at the JSC Liepājas metalurgs there were other enterprises of the manufacturing sector which were able to offset the problems in manufacturing of metals (in the second quarter -46.4% quarter-on-quarter). Thus, in the second quarter, the most rapid growth was recorded by the manufacture of other transport vehicles (+115.3%), which relates to the traditionally unstable shipbuilding where several ships have been launched within the last months. Hence, although the subsector of other transport vehicles is several times smaller than the sector of manufacturing of metals, it can at least partly offset the output decline in the metal industry. In the second quarter, a relatively dynamic growth was also observed in the manufacture of pharmaceutical products (+4.3%; rebound after a large decline in the first quarter), computers, electronic equipment and optical products (+5.5%), electrical equipment (+8.6%), motor vehicles and trailers (+8.7%), and furniture (+3.5%). The only decline in the volume of output was reported for the manufacture of building materials (-2.1%), wood (-0.6%), wearing apparel (-3.7%), while chemical industry still continues on a downward trend (-4.0%), which is mainly related to the consolidation of the bio fuel production sector.

The Latvian industrial confidence indicator aggregated by the European Commission (EC) continues to fluctuate close to zero, suggesting a potential further expansion of manufacturing in the coming months. The projected production capacity utilisation for the third quarter has also remained actually unchanged. The latest confidence indicators of European countries could be also assessed as positive. Both the Economic Sentiment Indicator and the Purchasing Manager's Index aggregated by the EC point to stabilisation of the situation, thus giving rise to hopes that hard times within this economic cycle are already behind.

Signals coming from the external environment suggest that manufacturing in Latvia is likely to experience a stronger demand for its output already in the near-term. This would help step up the output; nevertheless, the feeling that manufacturing in Latvia is not yet ready for next jumps in the context of industrialisation is still there. The production capacity utilisation is currently relatively high, and this, from the point of view of the economic theory, implies the need for investments; however, the non-financial investment statistics for the last quarters does not give rise to any optimism. In the last quarters, concerns about the future development of the euro area have reduced the risk appetite of businesses and their willingness to invest in new capital goods. At this point, we are quite slow in determining the fundamental factors of growth, i.e. linking of the educational system with the industrial labour demand, improving of the infrastructure (electricity, places of connection, industrial parks, etc.) and the business support mechanisms. Spare capacity will continue to support manufacturing output for some time to come, while the development of manufacturing over the horizon of 2–3 years will depend on the investment decisions taken be the businesses today and the public administration solutions for improving fundamental factors.