Manufacturing growth weakened in the third quarter

According to the data of the Central Statistical Bureau, in September 2015, the amount of manufacturing production at constant prices increased by  0.2% (seasonally adjusted data). Year-on-year, the production amount increased by 1.3%, which, considering the dynamic of previous months seems to be a very low indicator. Apparently, the data are influenced also by the slightly reviewed performance of the sector in previous months, which has become more negative.

September closed the less than successful for manufacturing third quarter: quarter-on-quarter (seasonal factors excluded) its production amount dropped by 2.1%. In the third quarter, good results were posted by the manufacturing of textiles (+13.7%), wood (+2.9%), computers, electronic and optical equipment (+10.9%), as well as furniture (+3.3%). Furniture production results in fact were a nice surprise this year, as cumulatively (in total) the output of the branch has grown by 15.2% since the beginning of the year. A weaker performance was the case in the production of electrical equipment (-4.3%), fabricated hardware (-4.6%), construction materials (-3.2%), and chemical substances (-6.1%). The third quarter was very successful for the energy sector – the amount of production grew by 5.6%, which was determined by the untypically high output of power in cogeneration stations. The weak performance of manufacturing is probably one of the factors that determined the slowdown in GDP growth in the third quarter of 2015.

Overall, the situation in manufacturing looks slightly better "on paper" than it is in reality. In real terms, output amounts increase (to a great extent owing to the activities of "KVV Liepājas metalurgs"), but to an enterprise itself and also to the public (as, for instance, taxes are collected from the nominal activities of the enterprise) the nominal aspect is important. Therefore, when analysing the successes or failures of manufacturing, it is worth it to pay attention to the nominal aspect, i.e. to the performance as it is reflected in actual prices (without adjusting to price changes). Even though the production output in the sector at constant prices increased by 5.1% year-on-year in the first eight months of the year, the sales amount in actual prices in the same period dropped by 1.0%. Two factors may be at work here:

(i) the price factor – for instance, as dairy prices go down, the actual output remains at the same level or even increases while the nominal output shrinks;

(ii) the stock factor – actual output points to the amount that has been produced but nominal output indicates how much of it has been sold. It is possible that some of the production has been stored in the storage facilities of the enterprise or wholesaler. Why is it important to understand these different trends? The production amount at constant prices will impact the numerical value of gross domestic product (GDP), whereas the nominal growth of the branch will have an effect on things more visible and more tangible: cost-effectiveness of enterprises, compensation for employees and, last but not least, tax collection.

The drop in manufacturing sales in actual prices was determined by the drop in sales in several branches, food industry first and foremost, where the year-on-year drop in sales has been 6.5% since the beginning of 2015. The drop is particularly impressive in the dairy product and fish product manufacturing branches, which have been affected by sanctions. Sales amounts post a very negative dynamic also in wearing apparel and construction material production and in the printing and publishing industry. At the same time, there are industries that have managed to increase their sales amounts substantially even under these relatively difficult conditions.  The greatest positive contribution was undoubtedly made by the wood industry, but the manufacturing of computers, electronic and optical equipment, mechanisms and furniture likewise post good results.  

The amount of manufacturing production in 2015 could increase by approximately 4% (this is a lower estimate, determined by the adjusted results of previous months), which, from the point of view of GDP growth is very good.  In overall GDP growth in 2015, manufacturing will make a positive contribution. At the same time, the growth in its sales amounts is likely to be close to zero. And that is bad news for the earning ability of the sector, rise in compensation and tax revenue.