Latvian external trade data present a pleasant surprise
The external trade data for July are a pleasant surprise: goods exports have grown 9.0% month-on-month and 7.4% year-on-year. The year-on-year growth has been fastest in wood and chemical industries, construction materials, transport vehicles, and mechanisms and electrical goods branches. The drop in the demand in Russia and fluctuations of its rouble as well as the slow and uneven growth in the euro area countries had a negative impact on the Latvian goods exports. From the longer perspective, a significant role in preserving Latvian export growth will be played by increased competitiveness, investments in productivity and innovative products as well as finding new markets.
The Latvian external trade data hold a pleasant surprise. Despite the negative political and economic background, in July, the Latvian external trade turnover of goods increased by 7.8% month-on-month, with the export and import of goods increasing by 9.0% and 6.9% respectively over June. Within a year, the export value of goods has risen by 7.4% and the import value of goods has dropped by 3.5%.
In seven months of this year, export has retained a 2.5% increase year-on-year, posting a rise in almost all main groups of export goods, except base metals and their products, textile products and foodstuffs.
Month-on-month, it was wood products, mechanisms and electrical equipment, transport vehicles, mineral products and base metal products that posted the fastest growth in July. Year-on-year, growth was still fastest in wood products, chemical industry products (cosmetics, perfumery, detergents, soaps etc.), construction materials, transport vehicles and mechanisms as well as electric appliances.
Compared to June, goods import experienced a rise in July that was observed in almost all groups of goods.
Albeit month-on-month export to Russia grew in July, in seven months overall it has dropped by 5.9% (or 35.2 mil. euro) year-on-year. The greatest drop in seven months export to Russia was in transport vehicles (trailers and semitrailers, other non-motorized transport vehicles), construction materials, electric appliances, base metal products and textile products, the export of medicinal products and liquor has also shrunk.
In July, export to Russia increased by 7.2% month-on-month, as a result of a rise in the export of agricultural products (butter, cheese, cottage cheese), chemical industry products (cosmetics, soap), electric equipment (block-condenser for 3.3 mil. euro), textile products (underwear, women's and men's wearing apparel) etc.
The export of Latvian goods was primarily impacted by a drop in the demand in Russia and fluctuations of the rouble, as well as the slow and uneven growth in the euro area. The flow of goods exports to the euro area dropped by 2.1% in seven months. Despite the drop in the rouble, Latvian entrepreneurs, including foodstuffs producers, whose business is as yet unaffected by the imposed sanctions, continue to export their goods to the neighbouring country while reckoning with a drop in the Russian demand. Several exporters of agricultural products and foodstuffs have confirmed that they continue to receive new orders both from Russia and Ukraine.
Yet in August, a drop in the export of agricultural products (particularly of animal origin) is expected, for this is the group most affected by the Russian embargo, which took effect in August. It was particularly the export of products included in the sanctioned list that increased at the beginning of this year, and their percentage increased substantially (from 4.5% in 2013 to 8.1% in the first half of 2014) in exports to Russia, but in August the exporters are unlikely to have found new markets for their products subject to sanctions.
For Latvian businesses, the situation at hand has become a turning point, for because of the geopolitical crisis involving Russia and Ukraine, substantial changes have taken place in the export demand markets. That in its turn introduces certain positive adjustments in the export structure both in terms of the range of goods and trading partners, thus reducing business risks. For instance, for the canned fish producer SIA "Karavela," Russia has now dropped to the third place from its traditional first in terms of sales volumes, being replaced by Sweden and Denmark. The pharmaceutical company AS "Grindeks", whose exports to Russia account for 35% of total turnover, continues to explore new markets (this year, "Grindeks" began exporting ready-made medicines to the United Kingdom, Finland, Slovakia, Spain and the Netherlands) in order to reduce risks and diminish its dependence on a particular region, despite the lack of any bad indications regarding its operations in Russia.
The weak economic indicators of the euro area in the second quarter of 2014 as well as data of business tendency surveys indicate that under the impact of the conflict between Russia and Ukraine, pessimism is growing in the economic outlook. That in turn may slow down the already slow process of recovery of the euro area, shrinking external demand even further. Risks are growing in the global environment because it is impossible to predict the outcome of this political and economic crisis in the context of the conflict between Ukraine and Russia. In the long run, it is not only increased competitiveness, which at the moment is making a positive contribution to expanding our export market shares, that will help Latvia to retain its export growth, but also investments in productivity of enterprises, developing new and innovative products and finding new markets. According to the information provided by the Latvian Investment and Development Agency, an increased interest from Eastern countries, including Ukraine, has been observed in the last six months in the possibility of investing in Latvia as a means of transferring capital to safer territories.