Exports are likely to sustain the momentum that started in 2017

This January, the solid performance of exports of goods sustained the export momentum that started in 2017 when the value of exports of goods increased by 10.1% compared to 2016. Export growth of almost all sectors contributed to the encouraging export performance of last year. This was supported by the improvement of the global economic situation, increases in global prices for oil, milk, meat, metals and other products as well as the strengthening of external demand.  It is therefore not surprising that re-exports also rose in such conditions. Moreover, the most positive thing about this is that the largest contribution to export growth came specifically from local producers. At the same time, this also raises hopes for future growth prospects in foreign trade.  

In January, the value of exports and imports of goods recorded month-on-month increases of 18.1% and 7.9% respectively. The largest contributor to export growth  was machinery, and this was determined by re-exports of turbojet and turbofan engines to the US. Exports of vegetable products also grew notably in January (exports of fresh and dried legumes to Egypt in the amount of 11.5 million euro). Positive annual growth rates in exports were likewise observed in other commodity groups including food products, articles of wood, base metals and articles of base metals, electrical equipment, transport vehicles, mineral products and furniture.

The buoyancy of investment activity, the availability of the European Union (EU) structural funds as well as the surge in domestic private consumption will continue to be the main drivers of the increase in imports of goods this year. At the same time, the high degree of capacity utilisation in businesses will maintain the need for investment also in the future. As in the previous year, the air fleet expansion will contribute significantly to the increase in imports of goods also in 2018. According to the publicly available information, JSC Air Baltic Corporation, the national airline of Latvia, received the eighth Bombardier CS300 aircraft (overall, 20 aircrafts have been commissioned). By the end of this year, JSC Air Baltic Corporation plans to receive seven more Bombardier CS300 aircrafts and, as from May, four Diamond Aircraft planes intended for training purposes at the airBaltic Training Pilot Academy recently established by the airline.

According to the confidence indicators published by the European Commission, the potential for Latvia's export growth is viewed as positive. The expected output may decline somewhat in the months to come; nonetheless, businesses see the potential for growth, since the volume of orders for goods, including export orders, has remained high. The overall EU economic sentiment indicator of consumers and businesses also points to a stable external environment and sustainable external demand. Furthermore, the latest data on investment growth in manufacturing confirm the sector's potential for boosting exports.

The wood industry, one of the main exporting sectors, saw a decline in the output at the beginning of the year on account of the high base achieved in January of the previous year and the negative impact of the weather conditions on the logging industry in January of this year; nevertheless, the value of exports of wood grew in January both month-on-month and year-on-year. An increase in non-financial investment in the wood industry observed in the last quarter of the previous year and several upcoming investment projects such as the investment of 2.1 million euro by the industrial pellet producer SIA Graanul Invest in the upgrade of its wood pellet production lines, the investment of 30 million euro in the creation of the wood pellet factory SIA Baltic Pellets Energy, the completion of the birch plywood factory SIA Stiga RM, the investment of 13.6 million euro by SIA Kokpārstrāde 98 in new technologies and products, all suggest that the sector is committed to continue its growth also this year.

Latvia's producers of agricultural and food products are also determined to maintain the positive upward trend in exports observed since the last year by continuing to penetrate into new markets and strengthening their positions in the existing ones. The businesses of these sectors are also planning significant investments, for instance, cooperative society of agricultural services Kuziks in Jēkabpils municipality is planning to invest almost three million euro in increasing their cereal storage capacity, while the food producer SIA Felici will invest 0.6 million euro in building a new plant for the production of natural muesli Graci in Ādaži.

The World Economic Outlook for 2018 suggests a sustained rise in Latvia's external demand, thus having a further favourable impact on exports. However, given the high level of capacity utilisation, the wage rise and the low level of investment made in the previous years, the growth rate of exports will be more moderate than in 2017. One of the challenges businesses face in maintaining their long-term competitiveness is the labour shortages preventing several businesses from taking full advantage of their potential and hindering further development. Moreover, the competition in external markets will also remain tight; thus, Latvian exporters will continue to face diversification challenges in terms of both goods and services. Therefore, businesses will remain alert and innovative in their search for new niche products and products with higher value added.