Latest manufacturing data do not invite optimism

According to the Central Statistical Department, the manufacturing production output in March dropped 2.2% month-on-month (seasonal effect excluded). The annual growth rate amounted to negative 5.7%, with the previous significantly negative annual growth rate observed back in December 2009.  Meanwhile the total industrial production output (including energy and mining and quarrying) increased by 0.7% as a result of the relatively cold March (4.2 degrees below the norm), which lead to an output increase in the energy industry.

In view of the financial problems at AS "Liepājas metalurgs", the negative trend in the basic metals sector (negative 36.1% year-on-year) was not a surprise. Even though the month-on-month data show the production volumes of the basic metals increasing slightly (by 4.1%), in April, according to operational data, they are likely to drop sharply. Pharmaceuticals are still a source of negative surprises; however, the survey data of the sector's businesses pertaining to the second quarter of 2013  show one of the most rapid predicted increases in capacity utilisation, indicating a possible increase in output volumes in the coming months. There is a drop in production in the wood and wood products sector resulting from negative factors affecting foreign demand and the lack of supply of raw materials to the industry. The output of chemicals dropped in March - a development that could potentially be related to the fire at the Olaine chemical plant.

The drop in manufacturing is consistent with the latest developments in the European economy. The manufacturing output data of the European Union have been deteriorating for quite some time and the current business environment indicators do not point to a substantial improvement in the situation.

The latest overall PMI (Purchasing Managers’ Index) data[1] once again point to a drop in the activity in the euro area.[2] April saw conditions in the manufacturing sector deteriorate at the sharpest pace in the year-to-date.  Manufacturing indices in France, Spain and Italy all signalled contraction, furthermore, the German manufacturing PMI also dropped below the 50 point mark in March and slid even lower in April, primarily as a result of a weaker demand.  The German construction sector, which is of key importance for Latvian exports, continued to drop in March (for the twelfth consecutive month). The Russian manufacturing PMI hovered above the critical 50 point mark in March and April, yet the rate of growth is evidently dropping, and this is mostly related to a drop in activity in the investment goods sector.

The latest European Commission's economic sentiment indicator data (ESI[3]) point to a deteriorating business environment in Latvia, Europe as well as Latvia’s main export partners. Latvian manufacturers expressed decreasing confidence levels both in March and April, moreover, according to the April data, the Latvian ESI is no longer the highest in Europe. As far as Latvian export partners are concerned, Lithuania is the only one among them where a slight improvement in both producer confidence and the overall ESI has been observed.  In Estonia, confidence fell in March for all businesses, with the exception of construction, while April saw a further deterioration in confidence, and this time around it was particularly because of construction. The ESI of Germany, which is Latvia’s fourth largest export partner, was still above the important 100 point mark in March; however, in April the indicator dropped below it.

An evaluation of the March manufacturing data suggests that this year in the Latvian manufacturing industry might not be as successful as the previous ones. First of all, Latvia’s largest manufacturing enterprise – AS "Liepājas metalurgs" – is facing problems. Secondly, there is currently a lack of signs of a substantial improvement in the European economic situation as well as the development of external demand. In April, like in March, the drop in manufacturing output will in part be compensated by the energy sector, but in the second half of the year manufacturing might act as a drag on overall economic growth.