06.12.2016.

Manufacturing output continues to rise; the energy sector posts good results

  • Igors Kasjanovs
    Igors Kasjanovs
    economist, Latvijas Banka

According to the Central Statistical Bureau information, in October 2016 the manufacturing output grew 0.8% month-on-month. Year-on-year growth was 7.0%. Even though the year-on-year increase looks impressive, it is important to note that October of last year ended the three-month period of dropping manufacturing output.

In a breakdown by sub-branch, there are no big changes compared with previous months. A striking development is the fast year-on-year growth in the food industry (+6.0%). Although it cannot be denied that the industry is lately doing better, a partial explanation is the low base effect. The situation is similar in the production of non-metallic minerals or construction materials (+18.8%). The branch of computer and electronic and optical equipment manufacturing is likewise posting vigorous growth and this month so does electrical equipment manufacturing e (+15.0%).

The performance of the energy sector deserves mention. Owing to the increase in the amounts of power produced, the output of the energy sector increased by 5.1% year-on-year. The currently available operational statistics indicate that these results could be even surpassed in November. Thus the energy sector will probably be an important positive contributor to the gross domestic product (GDP) growth in the fourth quarter of this year.

Most likely, manufacturing growth in 2016 will have exceeded the growth rate of the economy at large. Manufacturing output will have grown by about 4%, which is noteworthy, in view of the problems in the external environment and the slow growth of foreign demand.  

The increase in the manufacturing output results from an increase of industrial goods sales abroad. Domestic demand in 2016, on the other hand, has even impeded manufacturing growth. The branch turnover indicators bear this out: export sales in the first 10 months grew by 2.6%, whereas in the domestic market, sales dropped by 0.9%. The shrinking domestic demand can be in part explained by problems in the construction branch, which have meant decreases in some of the manufacturing sub-branches, such as the production of non-metallic minerals (mostly construction materials), fabricated metal products (including various metal building elements) and, to a lesser extent, in chemical industry and wood industry.

What are the likely future developments in the branch? For the time being, its future looks relatively bright. Barring new turmoil in the external environment, the growth in its output could be maintained or even becomes slightly faster owing to domestic demand (in 2017 construction activity should pick up as a result of the availability of European Union funds).

It should be kept in mind, however, that the capacities of the manufacturing industries are not limitless: unable to locate sufficient demand in the domestic market this year, merchants found it in foreign markets (albeit with lower profit margins). Next year the effect could be reversed (although we would hope to retain a position in the newly found markets).

The industry confidence indicators aggregated by the European Commission are currently rather positive (the November indicator is close to the post-crisis period record) pointing to the industrialists having orders, which will ensure further growth of the branch.

We can only hope that the branch will be spared new shocks in terms of the taxation policy and that a solution will be found for alleviating the burden of the mandatory procurement component (MPC) for energy-intensive businesses, which is currently the problem industry representatives mention most often.  

APA: Kasjanovs, I. (2024, 28. mar.). Manufacturing output continues to rise; the energy sector posts good results. Taken from https://www.macroeconomics.lv/node/1855
MLA: Kasjanovs, Igors. "Manufacturing output continues to rise; the energy sector posts good results" www.macroeconomics.lv. Tīmeklis. 28.03.2024. <https://www.macroeconomics.lv/node/1855>.

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