A small rise in manufacturing in May

The manufacturing output in May grew 1.4% month-on-month (seasonal factors excluded). The year-on-year growth rate still remained slightly negative (-0.2%). Taking into account the manufacturing data for April and May, it can be expected that in the second quarter of this year manufacturing will be the industry with the greatest negative contribution to the growth of gross domestic product, yet the developments in the industry are not necessarily grim.  

By sub-branch the trends observed in previous months persisted. Relatively rapid growth is still demonstrated by the food industry (annual growth rate +6.2%), manufacturing of electrical equipment (+16.7%) and furniture manufacturing (+17.0%). A good growth rate was demonstrated in May also the manufacturing of other transport vehicles, which, in all likelihood is related to the launching of one of the ships of "Rīgas kuģubūvētava". Evaluating the publicly available information, it is expected that this level will be at least maintained also in June and July. The greatest negative growth rate is, of course, observed in the metals branch where "Liepājas metalurgs" in May essentially stopped its operations.  It is clear already that in June and, in all likelihood, also in July, there will have taken place no manufacturing activities, and even the further prospects look grim. Stagnation continues also in the wood industry that is important for Latvian manufacturing and export: the annual growth rate is still hovering around zero (-0.6%). That could have been predicted, because problems in the industry come both from the demand and supply sides. Electrical power and gas supply industry in May has grown by 3.9%, which thereby can compensate the small minus in manufacturing.. A positive fact is that even though there are problems in Latvia’s largest manufacturing enterprise, manufacturing is capable of demonstrating growth month-to-month –development in other sub-branches is at least for now capable to fully compensate the substantial negative effects that stem from problems at “Liepājas metalurgs”..

The predictions voiced at the end of last year regarding a gradual improvement in the external environment at the beginning of 2013 have not been fulfilled. At the beginning of the year, both the European real economy and conjuncture indicators were more negative than expected. The data from recent months, however, point to the possibility of the other half of the year being better.  Thus the business confidence indicator aggregated by the European Commission continued to grow in June and also the euro area Purchasing Managers Index in June almost reached the 50-point mark that indicates stabilization of the situation.

The manufacturing output of Latvia in 2013 is likely going to drop year-on-year as a result of the substantial drop of production volumes in the metals industry related to the halt of operations of "Liepājas metalurgs". Yet even without problems at "Liepājas metalurgs", manufacturing growth probably would have been lower than we have been used to seeing in previous years. The positive factor for the end of this year is the more rapid recovery of the external environment, which could have a positive effect on the branch, yet in the medium and longer term, the development of manufacturing will be determined by domestic fundamental factors: rise in productivity, prices of energy resources as well as the overall industrial policy that includes both infrastructure and tax policy.