Export data solid, but exporters' confidence weakened by external uncertainties
After hitting a minor speed bump in September, exports of goods performed quite well again in October. The seasonally and calendar adjusted figure, however, is negative, hence there is no reason to be overly excited. External uncertainties in combination with the rising global trade tensions, weakening demand from trade partners as well as poorer grain harvest after the extremely dry summer had a negative effect on manufacturing development, raising a question whether the growth reported for the exports of goods can be sustained.
According to the data released by the Central Statistical Bureau of Latvia, exports and imports of goods increased by 6.8% and 18.8% year-on-year respectively in October 2018.
The value of exports and that of imports totalled 10.22 billion euro and 12.94 billion euro respectively this year.
In the first ten months of 2018, the value of exports of goods has recorded a year-on-year increase of 8.3%. Despite some deceleration in the second half of the year in comparison with the beginning of the year, annual growth remains positive for major groups of export goods with the largest export shares. Weaker growth of the exports of goods in the third quarter was mostly a result of a year-on-year decrease in the value of exports in September. In October, export growth returned to a positive territory, confirming the previous hopes that the September fall was just a short-lived setback.
Wood processing, being the largest contributor to manufacturing growth, continued to be also the major positive contributor to the exports of goods, having managed to increase the exports of articles of wood by 18% in the first ten months of 2018. The most impressive growth in the above exports was reported to Sweden and the United Kingdom, with exports of wood to Finland, Estonia, China, Egypt and Belgium also accelerating considerably. Similar growth of 16% in the first ten months was also reported for the exports of articles of base metals, primarily thanks to the rising exports to Estonia, the United Kingdom, Lithuania, Sweden, Pakistan and the Czech Republic. Exports of machinery and mechanical appliances as well as transport vehicles have also experienced relatively strong growth, but mostly on account of re-exports and one-off transactions. After what had so far been quite a bleak performance, exports of products of the chemical industry (pharmaceutical products, cosmetic articles, soap and other washing detergents, candles and other chemical products) accelerated significantly in October. Higher exports of mineral products in October were supported by the rising oil prices.
At the same time, agriculture and food industry are not doing very well this year. Exports of agricultural products have primarily contracted on account of lower exports of cereals as a result of the persistently dry weather conditions experienced in summer. Exporters of dairy products have also had a rather unsuccessful year: their exports were negatively affected by the decline in the global milk prices as of July as well as the financial problems faced by two milk processing companies. Despite the comparatively weak performance this year, the food industry is constantly exploring new export markets and several new certificates have been issued this year for exports of meat products, fishing products as well as milk and dairy products to Congo, Argentina, Chile, Hong Kong and Serbia.
The nominal value of the imports of goods increased by 11.1% year-on-year over the first ten months of 2018. Imports continue to benefit from the availability of the EU structural funds, air fleet expansion of the national airline airBaltic and growing private consumption. In August, September and October, a major role in import growth was played by the filling of Inčukalns gas storage facility and rising global energy prices.
Confidence indicators published by the European Commission show that in the fourth quarter the views of businesses about their competitiveness positions in the domestic market as well as the EU market and outside the EU have deteriorated significantly. Although the economy is growing strongly at the moment, the government formation drags on and has a negative effect on business and exporter confidence because there is no clear vision as to the future government priorities and economic development policy. External uncertainties also remain high in the context of both economic and geopolitical developments. Consequently, it can be expected that export growth will continue to decelerate in the last months of this year, and in 2019 it could be slightly lower than this year.
Even in the circumstances of tough competition and weak demand well-targeted restructuring of business, diversification of output and markets can have a positive effect on business performance and exports; therefore, Latvia's businesses should continue to be flexible in addressing the various challenges they are facing.