Manufacturing in April departs from previous achievements

According to the data provided by the Central Statistical Bureau, manufacturing output dropped by 1.6% month-on-month (seasonally adjusted data) in April. Year-on-year, the output decreased by 0.3%. In view of the dynamic observed in previous months, these data are hardly surprising: in the previous two months, a very fast rise in output was experienced.

In April, the total output decrease was determined by weaker results in both largest sub-branches of manufacturing – wood industry (month-on-month drop of 3.6%) and food industry (-4.3%). In food industry, April performance was extremely weak because of poor results in all of its sub-branches, but particularly in the production of meat products as well as fruit and vegetable processing. There were comparatively large drops also in the production of chemical substances (-14.4%), electrical equipment (-6.8%), as well as non-metallic mineral substances or construction materials (-4.9%). As far as the production of construction materials is concerned, the first-quarter results in the industry were so outstanding that even with the output drop in April, the year-on-year growth rate remained rather high (+7.2%). Meanwhile, growth of the industry benefited from the rise in production volumes in the production of computers, electronic and optical equipment (+15.6%), fabricated metals products (+6.3%), as well as wearing apparel (+7.0%). April was a sluggish month also in the power and gas supply industry (-0.3%).

Considering the sub-branch data, it becomes obvious that the industries that have suffered from the weakness of the Russian economy and Russia-imposed sanctions are still dealing with the effects of the situation. Year-on-year growth is still negative in the food industry and the production of beverages and electrical equipment. Moreover, there are still enterprises whose situation is not improving; thus recently the media reported on problems at the "Daugavpils Lokomotīvju remonta rūpnīca", and some other factories that are oriented toward the Russian market have yet to find new markets. It is also no big surprise that the production output is smaller year-on-year. In this case, it is important to note that last year, April was the month when "KVV Liepājas metalurgs" resumed energetic work, whereas now it once again is not turning on the ovens thus creating an unfavourable base effect.

The beginning of the year in manufacturing was very uneven. In January there was a fast drop in output followed by a rise in February and March, but a drop came once again in April. It is difficult to spot a uniform trend in the mixed bag of data, but for now it seems that the manufacturing growth could be weak this year as predicted before – a mere few percent. The good news is that with the situation improving in the external environment, it can be expected that in the second part of the year, output in the branch could increase. The European Commission's indicators of industry sentiment also point to this as they are gradually improving and currently are above the levels of the previous year.

The bad news is that "investment draught" has affected not only construction but also manufacturing. In the first quarter of this year, the amount of nonfinancial investment in manufacturing decreased by 23.0% year-on-year. Even though the disruption in the flows of European Union (EU) funds will be short-lived, it must be taken into account that, beginning with the new planning period, the finances available to manufacturing will not be as easy to obtain as before. In the new planning period the grants for purchases of equipment that used to be extended generously will decrease.

In the new period, the funding focus will be on innovation, the establishing of new enterprises, the development of an environment conducive to entrepreneurship (with the participation of local governments), the development of production space and infrastructure (financing for the small and medium businesses for the construction or reconstruction of premises where production is to take place); a more important role is likewise accorded to financial instruments (favourable loans and guarantees as well as risk capital). It is very possible that some time will pass before manufacturers have adjusted to the new rules of the game and, correspondingly, investment activity in the industry could be lower, which has to have an unfavourable influence on the higher output potential.