Manufacturing resumes growth; qualified workforce and investment needed for development

In March 2011 the manufacturing output increased 3.7% month-on-month (seasonally adjusted data). The annual growth in March was 12.5% (calendar adjusted data), which is a little less than was seen recently and is explained both by the reduced base effect – the high indicators a year ago – and the weaker development of the industry lately.

From the quarterly perspective, the manufacturing output in the first quarter of 2011 dropped 3.1% quarter-on-quarter (seasonally adjusted data). Yet growth, 12.8%, has been retained year-on-year.

Annual growth in the first quarter of this year has been retained in the majority of subsectors, but with some exception. Output dropped in the production of beverages (-9.2% year-on-year, calendar adjusted data), paper (-3.1%), chemicals (-22.5%), and other vehicles (-14.7%). In other subsectors annual growth remains, particularly in timber industry (+17.6%), readymade metal products (+32.4%), printing and publishing (+11.3%), textiles (+7.2%), and electronics (+37.9%). In mining, however, output dropped 18.5%, primarily because of adverse weather conditions.

The growth in manufacturing is at the moment primarily determined by foreign demand, which, along with improved competitiveness has ensured that Latvian manufacturing has resumed relatively high output, which is currently at about the autumn 2008 level. For further balanced development, however, a recovery of domestic consumption is also needed. Since the Latvian domestic market is small, selling industrial production abroad is indispensable for economic growth; yet the operations of businesses in foreign markets is subject to many risks: political events, natural disasters, the various peculiarities of doing business in particular countries, etc.

Most of the economies have now recovered from the economic crisis that struck them in 2008 and 2009, with the global trade flows gradually resumed, which means that a rapid growth in foreign demand of the kind seen in 2010 is not expected in the near future. Even though forecasts relating to foreign demand in our main trade partners are positive, overall great risks remain in the global environment. Uncertainty regarding the development of foreign demand is probably what keeps export oriented businesses from investing in increased production capacities. The cause for additional uncertainty in Latvian manufacturing is seen in the increased costs of several kinds of raw materials in global exchanges, an urgent lack of raw materials in some sectors (chemical and food production industries), as well as lack of confidence in the state tax policies, which have been particularly inconsistent in the last three years.

The confidence indicators published by the European Commission highlight the uncertainty regarding the future development of manufacturing. Albeit the overall industrial confidence indicator in April dropped only 0.1 points, some of its components are worrisome. To wit, the surveys of the last two quarters indicated that the outlook on the part of industrialists regarding the amount of future orders has deteriorated substantially. Among the factors limiting growth, manufacturers increasingly point to workforce, which means that they are facing a lack of qualified workforce already now.

For growth to be retained in manufacturing in the next few years, entrepreneurs need innovative solutions for developing and promoting their products as well as new investment. The more strategically thinking industrialists are sure to be looking not only at developing their products and production lines but also at improving the skills of their workforce, which, in the middle term, may become the factor that most limits manufacturing growth. 

Fig 1. Dynamics of manufacturing

Fig. 2. Rate of annual growth in manufacturing industries in the first quarter of 2011 (calendar adjusted data)