Manufacturing output shrinks, yet confidence still intact

According to the information by the Central Statistical Bureau, the amount of manufacturing production in February 2012 dropped 2.4% month-on-month. In recent months, manufacturing dynamics has fluctuated, yet there has been a slight downward trend that indicates a weakening of demand among the main trading partners. As a result of the cold weather the amount of mining and quarrying production output in February dropped 10.5% month-on-month, whereas the supply of electrical power and natural gas increased by 5.7%.

The annual growth still remained high at 10.6% (calendar-adjusted data), as a result of the manufacturing output growth in the second half of 2011. 

In the first two months of the year, the production of fabricated metal products was up (+21.3%) and so was the production of wearing apparel (+14.9%), pharmaceuticals (+14.0%), basic metals (+11.7%), other transportation vehicles, primarily ships and locomotive engines (+24.2%), as well as the production of motor vehicles and trailers (+17.9%), according to seasonally adjusted data. Meanwhile, in the two largest branches of manufacturing, food production and production of wood and its products, the production amounts went down, by 2.2% and 4.6% respectively. The drop in production output in the food industry supports the retail trade data where growth is primarily the result of purchases of durable goods. The drop in the production amounts of wood and its products was possibly determined by the unfavourable weather conditions, which impacted both the branch itself and also construction. Textile production was also down (-0.8%), and so was the production of rubber and plastic products (-2.2%), non-metallic mineral products (primarily construction materials) (-8.0%), and electrical equipment (-12.5%).

The industry confidence indicator evaluated by the European Commission in Latvia has shown impressive stability also in March (improvement by 0.5 points). The reason for this is not, however, entirely clear, as the overall confidence trend continues to be negative: the industry confidence in the EU in March dropped 1.8 points, including 2.5 in Great Britain, 2.4 in Germany, 1.3 in the Netherlands, and 1.1 in Spain. The Latvian industry confidence indicator, on the other hand, has improved by 3.1 points since the beginning of the year, reaching the level of early 2008. This was determined by improvements both in the evaluation of  order books and the predictable level of output. At the same time, a cause to worry is the gradually increasing evaluation of stocks – an ever increasing percentage of manufacturers are of the opinion that the stock levels are too high. Yet this situation requires a complex approach – the greatest drop in confidence among the EU manufacturers was observed in the fall of 2011. Even if we assume that the various economic effects reach Latvia with a delay, a slight increase in stock would be only logical. If, however, this amounts to the impact of the downslide of the European economy experienced throughout the fall and winter, then we can say that we have made it through relatively well…

The overall developments both in Europe and here in Latvia still give rise to worry about the expected drop in Latvian manufacturing output amounts. The Purchasing Managers Index (PMI) in most European countries has deteriorated further and so have the EU confidence indicators. Moreover, the recent data on the real economy do not point to a European economic recovery. In all likelihood, the dynamic of Latvian manufacturing will continue to fluctuate in the coming months as well – particularly in the sub-branches whose operations are geared toward the export markets. The overall tendencies in the industrial products market are also changing slightly –, as the private consumption strengthens and construction activity resumes, the branches oriented toward domestic demand, e.g. food and non-metallic mineral (construction materials) production, are beginning to recover. In several branches, however (wood processing, metals and fabricated metal products) the capacity utilisation rates are close to their historic maximums. Some branches, which previously played a lesser role in the Latvian manufacturing, continue to expand (the production of transport vehicles, electrical equipment etc.)

So in 2012 overall, the results of the manufacturing industry will depend on how quickly it can adjust to the changes in the economic situation: the possible drop in demand in Europe, rise in oil prices, lack of workforce and other factors.