Foreign trade activity down in June

The annual export growth in June remained high (30.2%), yet the positive manufacturing real monthly growth data were not reflected in the nominal export data, which showed an 8.8% drop month-on-month. In the case of a drop in the exports of base metals and articles thereof it could be explained in part by a drop in the global prices, but in many other groups of commodities it cannot really be explained either by seasonal fluctuations or impact of prices. Even earlier business tendencies pointed to a weakening demand in foreign markets, and that has been obvious, for instance, in the drop in the exports of wood pulp. The reduced exports in the above two groups of goods accounted for almost two thirds in the monthly drop in exports in June. The export values of mechanisms and mechanical appliances also shrunk, yet a positive development was observed primarily in the exports of food industry and mineral products. 

The value of imports dropped by 7.2% over a month, but the rate of its annual growth was at 27.4%. This was partly on account of a small drop in prices of metals in the global market, yet the shrunken imports of chemical products, transport vehicles and mechanisms and mechanical appliances point to a weakening domestic demand for intermediate consumption goods and capital goods. 

The future trends in Latvian foreign trade of goods will be determined by several domestic and external factors:

• A slower development of exports in the coming months is likely to result from the deterioration of economic development prospects of a number of Latvia's trading partners. The evaluation of export orders is also less optimistic. Such trends are only exacerbated by the global debt crisis and the anxiety reigning in the world's securities markets.
• Russia has lifted its ban on vegetable imports from the EU countries as of 9 August. In this group of goods thus the exports of seasonal vegetables could increase. Even though the Russian ban was one of the factors that promoted the drop of retail vegetable prices in the Latvian market in the summer, a resumed rise in vegetable prices is not expected because this year's harvest in Europe is so far considered good.
• The June retail data point to the positive impact of the rise in employment on consumption. The commercial banks also confirm resumption of consumer lending. Thus a small rise in the imports of consumer goods could be expected, for instance, in the groups of durable goods. Yet this trend is likely to be short-lived if the global developments have a more substantial effect on Latvian exports, also slowing down domestic economic activity.
• The development of large, including infrastructure, projects, could impact the import-export ratio in several groups of goods. E.g., the Federation of Latvian Timber Industry is waiting for an announcement of tender for furniture for the new building of the Latvian National Library, pointing to the substantial effect such an order would have on the development of the industry, including allocation of resources for filling other orders in the domestic market or for export. Likewise, the allotment of Cohesion Fund financing to the renewal and expansion of the infrastructure of the Riga Airport could promote the inflow of imports for certain materials used in construction or the diversion of their exports for the domestic market.
• The stabilization of the political situation and a timely adoption of the 2012 budget, with consolidation carried out at the expense of budget expenditure, is no less important. That will act to both support the competitiveness of Latvian producers and send a clear signal to potential investors who are possibly postponing any decisions to invest in countries with an impeded economic development.