Manufacturing accelerated in the second quarter

According to the data published by the Central Statistical Bureau of Latvia, manufacturing output grew by 0.3% month-on-month in June 2016 (seasonally adjusted data). At the same time, the output growth was relatively strong (8.2%) in comparison with June 2015, and this is one of the most rapid annual increases experienced by the sector in the recent years. Thus, in the second quarter of 2016 the volume of output in manufacturing rose by 3.8% quarter-on-quarter, making a substantial contribution to the GDP growth in the second quarter.

A 8.3% rise in the volume of output in wood industry (the industry is the main driver behind manufacturing growth) and the successful performance of fabricated metal products sector (+15.6%; almost two thirds of the production are exported) were the contributors to a positive annual growth rate in the second quarter of 2016.

The manufacture of computer, electronic and optical products continues to be the fastest growing sector (+22.1%), which is still experiencing very dynamic growth observed already for several years. This is primarily determined by the growth of the company Mikrotīkls Ltd.; however, other sector's companies likewise represent successful development. Mikrotīkls Ltd. has grown from a medium-sized business to one of Latvia's major manufacturing companies in recent years; moreover, it has high profitability ratios. In July, the repair and installation of machinery and equipment – an industry which is mentioned less frequently – also had excellent results (an annual increase of 43.4%). This is most likely related to the performance of a sizeable order in carriage construction.

Meanwhile, lower production output of the food industry (–0.8%; with the fishing industry recording the sharpest drop) had a negative impact on manufacturing. However, the annual growth rate of the food industry turned positive in June.

The manufacture of wearing apparel, chemical substances and electrical equipment also record a negative annual rate of increase (–5.0%, –7.1% and –6.6% respectively). A negative annual growth rate is primarily recorded in the sectors still suffering losses due to sanctions imposed by Russia. A positive development is the fact that the number of subsectors registering positive annual growth rates has increased in recent months, which means that the sector is on the rise.

It should be noted that the second quarter has also turned out to be successful for the energy sector
– the volume of its output has risen by 4.2% in comparison with the second quarter of 2015.

Naturally, the sector still faces different types of risks. Some uncertainty among wood businesses is still in the air due to Brexit (the United Kingdom is a large market for wood businesses), and the manufacturers of building materials also encounter problems on account of the weak construction activity, which so far, however, can be offset by exports. Following the Brexit vote, concerns were also expressed with regard to the expectation of the so-called leading indicators (survey indicators). However, they are not as bad as one would think. The Latvian industrial confidence indicators aggregated by the European Commission have not suggested any dramatic fall in July (although, contrary to June, there is a minor decline, albeit small enough not to unambiguously claim it has been triggered by Brexit). Meanwhile, industrial outlook has even improved slightly; therefore, it can be concluded that Brexit has not caused panick among manufacturers.

The previous negotiations with manufacturers have also provided a proof that Brexit is not likely to have a significant impact on the functioning of the sector. The good results of the sector achieved in recent months suggest that its annual growth rate could be higher than previously expected. At this stage, it seems that the sector could reach a level above 3%. This means that it is likely to be one of the most important drivers of GDP growth in 2016.

However, the weakness of the construction and some services sectors weighed down on the performance of manufacturing.