Latvian export volumes close to pre-crisis levels; the future will be determined by productivity

In June of 2010, the exports of Latvian goods grew 23.3% year-on-year and imports 22.0%. Even though month-on-month, a small seasonal drop in foreign trade was observed in June, in the second quarter overall exports reached the level observed a few months before the crisis set in, with imports averaging about the level of the first half of 2006. As a result of growing competitiveness and gradual recovery of the foreign markets, the nominal exports of Latvian goods in the first half of 2010 grew 22.9% year-on-year, with imports growing at a slower rate (8.3%).

A month-to-month growth was observed also for the exports of food products, wood pulp and its products, means of transportation as well as mechanisms and mechanical equipment exports, which together accounted for 49.9% of the goods exports. Over the course of the year both imports and exports have grown for the majority of the most important groups of goods, except mineral products.

Several indicators characterizing competitiveness continue to improve.
As a result of cost cutting measures, the real effective exchange rate of the lats, which characterizes price and cost changes vis-à-vis the price and cost dynamics of the main trading partners, continued to drop.
The gradual resumption of manufacturing allows for a fuller exploitation of the manufacturing capacities: the assessment of the employment of processing industry capacities in the third quarter improved by five percentage points quarter-on-quarter.
The data available from Latvia's main trading partners allow us to evaluate our market shares in April and May, indicating that the Latvian export shares have grown rapidly in the imports of such important trading partners as Denmark, Germany, Lithuania, the Netherlands, Poland, Finland, and the United Kingdom.

The assessment of export orders improved a little in July, giving rise to hopes for a continued growth of exports in the next few months. In the second half of July and the beginning of August growth of the Baltic Dry index (in contrast to the drop in May and June) was observed, indicating a rise in demand for cargo transport by sea and could have a positive effect on Latvian service exports. The unfavourable weather conditions (heat and storms) in many parts of Europe, which is at the basis of the rises in grain prices this season and limits on the trade of grain (e.g., the ban on grain exports in Russia), may open up opportunities for Latvian grain exporters in the coming months. The harvest is not yet over in Latvia, however, and the weather conditions are not stable, so there remains a risk that prices may rise domestically.

As the global economy recovers from the crisis and the influence of various support mechanisms diminishes in manufacturing and export as well as the positive impact of price and cost drops on the competitiveness of Latvian exports dwindles, the Latvian export volumes will be increasingly affected by the degree to which productivity rises.