04.02.2016.

Manufacturing ends the year on a negative note

  • Igors Kasjanovs
    Igors Kasjanovs
    economist, Latvijas Banka

According to the data provided by the Central Statistical Bureau (CSB), manufacturing output at constant prices in December 2015 grew 3.0% year-on-year. That means that in the year overall, manufacturing output grew by 4.1%, which in view of the complicated situation both in the region and the world is a considerable achievement.  Thus in 2015, manufacturing results were among the main GDP growth engines. It must be noted that in the fourth quarter, output in the branch dropped by 0.7% (compared to the third quarter, seasonally adjusted data), thus impacting also the weak gross domestic product (GDP) results.

In December 2015, manufacturing output did not change substantially month-on-month (+0.1%). By sub-branch, a strong growth in the production of electrical equipment after languishing all year should be highlighted (+18.6%) as should the habitual record in the wood industry (+5.1%; the annual growth rate has accelerated to 13.9%). As for negative factors, the deteriorated situation in the production of construction materials deserves noting (-9.0%; the annual growth rate has already dropped to -24.3%) as does the production of metal products (-5.3%). Both branches are related to construction where a slowdown is currently the case.  The output of metal products is curtailed also by unfavourable global developments.

The year 2015 was overall very mixed in manufacturing. This resulted from the economic sanctions imposed by Russia, its economic weakness, the slowdown in the growth of developing markets, substantial drops in the prices of oil and metals and other factors. Consequently, inside manufacturing, in breakdown by sub-branch, the conditions at enterprises and business sentiment have varied greatly. The largest sub-branch of the industry, wood industry, stood out with surprisingly sustained growth. Despite the fact that in the global timber market, the situation cannot be said to be good, Latvian wood enterprises managed to achieve stable increases in the production volumes (+6.9% in 2015). That was possible due to investments of previous years as well as acquiring new markets and fabricating new products. Just as the wood industry, furniture producers also had a very good year (+13.9%).

The other largest sub-branch, food industry (-5.0%), meanwhile has faced serious problems. The Russian sanctions and drop in the value of the rouble has considerably changed the competitiveness of food producers in the region. The fishing industry, for which the Russian market has traditionally been extremely important suffered the most. The dairy farms and dairy industry faced similar problems: they were impacted both by the effects of Russian sanctions and the globally low purchasing prices of milk.

The computer, electronic and optical equipment producing industry should be singled out for reaching new heights in 2015 (+39.3%); if just a few years ago it accounted for only about one-and-a-half percent of the total output of manufacturing, then in  2015, it was approximating a.  4% share. It should be emphasized that, despite weakness of the Russian economy (which was the main export market of some sub-branches), the production of various mechanisms and equipment has also grown (+7.5%). For another subsequent year, the production of wearing apparel (-15.6%) should be singled out in a negative way; its output volumes continue to decrease, reflecting the competitiveness problem in the branch created by the increased costs of labour. In textile production (-5.8%) as well the beginning of the years looked dismal, whereas the second half of the year seemed to suggest that the industry had overcome its short-term crisis. Notable was also the drop in the production volumes of construction materials (-10.0%), which was strongly influenced by the drop in output in Latvia and the region.

In 2015, "KVV Liepājas metalurgs" resumed partial operations. The CSB unfortunately no longer provides data on the production of metals, pharmaceuticals and other transport vehicles (mostly shipbuilding). Evaluating the publicly available reports, the pharmaceuticals output increase could have been small (1-2%) in 2015, whereas it should have been rather substantial – double-digit, in all likelihood -- in the production of other transport vehicles.  The lack of data prevents us from evaluating the results of "KVV Liepājas metalurgs," but calculations suggest that the contribution of the enterprise in the growth of manufacturing might have been close to about 3 percentage points. That means that, this one factor excluded, manufacturing grew around 1% and thus slightly slower than the economy overall, but, as noted above, it is not a bad result given the global circumstances.  

Evaluating the development of the branch, one should not forget the nominal side, namely, the effect of prices, which is instrumental in determining the earning power of enterprises. In the first 11 months of 2015, manufacturing sales in nominal prices dropped by 1.2%. That indicates that the effect of prices had an adverse impact, which is not surprising – the global prices have gone substantially down in food production and metals sales.

What can the branch expect from 2016? The Latvian business sentiment indicator aggregated by the European Commission was almost consistently stable throughout 2015. At the beginning of 2016, it also is slightly above last year's average. Businesses still mention the lack of demand as the main growth impeding factor most often   (45.8%). The predicted full load of production capacity has been stuck in the71-73% range for a fourth consecutive year. When talking to manufacturers, the most frequently voiced conclusion about 2016 is that uncertainty is still high and the situation in the region fragile. Therefore, they do not consider large investment projects, instead looking for internal resources (optimization of processes, slight modernization measures etc.), on account of which output could be increased. If there are no new geopolitical shocks, 2016 should be slightly better for the food industry (the industry is gradually finding new markets). Wood industry will likely maintain the previously achieved level and output may rise by a few percent.   In metal production, on the other hand, success will probably be measured my maintaining last year's level (the supply of metals from the developing countries is beginning to impact Latvia as well). In view of all of the above, Latvijas Banka predicts an increase in manufacturing output in 2016 at about 1.0-2.0%. 

APA: Kasjanovs, I. (2024, 29. mar.). Manufacturing ends the year on a negative note. Taken from https://www.macroeconomics.lv/node/1916
MLA: Kasjanovs, Igors. "Manufacturing ends the year on a negative note" www.macroeconomics.lv. Tīmeklis. 29.03.2024. <https://www.macroeconomics.lv/node/1916>.

Similar articles

Restricted HTML

Up