Goods sales balance substantially improved in January

In January 2011 the Latvian goods sales turnover grew 42.6% year-on-year. After the rapid rises experienced last year, both the export and import volumes dropped month-on-month. The decreases were primarily the result of the minimal foreign trade activity that is seasonally characteristic of January. The goods trade balance saw a substantial improvement with deficit dropping to 67.3 mil. lats. The annual growth in exports and imports remained high at respectively 51.3% and 35.9% as a result of the base effect.

The greatest annual goods exports growth in January was still seen for wood pulp, iron, and steel (3.5 times), mechanisms and mechanical devices, mineral and agricultural products. The increase in wood pulp exports was not affected by the unrest in Egypt in late January (Egypt is one of the markets for Latvia's wood products). Latvia's main goods exports partners in January were Lithuania, Estonia, Germany, Russia, and Sweden.

Albeit imports contracted compared to December, the annual increase in imports was maintained by the previously observed demand for the intermediate consumption and capital goods. Import growth was most rapid for plastics and plastic products, ferrous metals and their products, mechanisms and mechanical devices as well as vehicles. The continued weak domestic demand did not promote imports of consumer goods. Latvia's most important import partners were Lithuania, Russia, Germany, Poland, and Estonia.

As sawn timber makes up 31% of wood pulp exports, it can be predicted that in the coming months the negative effect on the timber industry of the unrest in Egypt and the natural catastrophe in Japan will become apparent in the export indicators as Egypt was Latvia's third (9.8% or all sawn timber exports) and Japan its fifth (7.1%) most important sawn timber market in 2010. In the short term, no substantial effect on total exports will be felt, since exports to Egypt and Japan account for only 0.6% and 0.5% respectively of the total. Nor is the political unrest in Libya and Tunisia likely to have a direct effect on Latvia's foreign trade: the proportion of imports-exports with these countries is negligible.

Even though it would be premature to characterize the January data as a signal for a change in the trends in foreign trade development, a drop in foreign demand was evidenced both by the industrial production sales fluctuations in the external markets as early as the end of 2010 and the January industrial production data broken down by industry – manufacturing volumes were down for a third consecutive month. It is important, however, that increased production was maintained in the largest exporting industries. It means that the output of the exporting industries will continue to grow at least for the first half of 2011. Fiscal problems and budget consolidation measures in some of the euro area member states may limit EU's total growth, but demand will continue to increase in Latvia's principal foreign markets: the Baltic countries, Germany, and Sweden.

In the medium term, stable export growth may be threatened by the rising energy and raw material prices resulting from the political upheavals abroad, tax increases, the high enterprise loads of capacity, and the lack of qualified workforce. To stabilize Latvia's economic development in the long term, Latvian industrial enterprises require investments for increasing their production capacities and adequately qualified workforce. To attract potential investors for opening new production units and developing new products, it is necessary to stabilize the investment environment and improve the country's credit rating. To that end, the expected additional budget consolidation must be carried out in a responsible manner, without any adverse effects on the recaptured competitiveness of businesses and the economy at large and reforms in education must be continued to balance the demand for workforce with the supply and workforce quantity with workforce quality.

Growth in domestic demand is still expected to be low in Latvia, therefore it is export growth that will drive economic development in 2011.