Manufacturing output drops; future prospects could benefit for an improved situation in the export markets

According to the data of the Central Statistical Department, manufacturing production output dropped by 2.4% (m/m) in August (seasonally adjusted data at constant prices). The annual growth rate was also negative (-2.5%). The drop in industry at large (-2% month-on-month) was promoted by a drop in mining and quarrying (4.3%), and slightly reduced by an increase in the production output of electrical energy and gas supply (0.8%).

Viewed by sub-branch, it is obvious that, compared to the July output, the largest negative contribution is coming from the high performer of the previous months – i.e. from the production of other transport vehicles, which, in previous months, managed to partly compensate a sharp drop in output even in such big sub-branches as metal production. The output of other transport vehicles dropped by 66.7% month-on-month and by 40.7% year-on-year. The second biggest contributor has been the repairs of equipment and appliances (-16.1% m/m, -39.8% y/y).

The large manufacturing sub-branches, on the other hand, have recovered slightly: their positive contributions are the greatest in manufacturing. The food production sub-branch grew both month-on-month (2.9%) and year-on-year (6.9%). In wood and wood pulp industry, production output against July has grown by 3.6% and against August of the previous year by 3.7%, which may be related to the recovery of the construction market in our main partner countries in Europe.  The month-on-month drop in the metals branch has stopped, but year-on-year the drop is still significant (-66.3%), having a pronounced negative impact on the year-on-year growth of manufacturing overall. The sub-branches of computer, electronic and optical equipment production  (7.1% drop month-on-month, but a 33.8% rise year-on-year) and electrical equipment production (a 1.4% rise month-on-month, 16.9% rise year-on-year), on the other hand, continued to have a positive impact on the year-on-year growth of manufacturing.

The August manufacturing data match the data of the monthly survey data of the European Commission (EC), which pointed to deteriorating industry confidence in Latvia. The industry evaluation of output for the coming months dropped both in August and September, which can indicate a slower future development in the branch. On the other hand, the evaluation of finished production stocks dropped in September. Thus the overall industry confidence in September has hardly changed month-on-month.  

After a pause of more than two years, the European Union ESI (Economic Sentiment Indicator)[1] exceeded the 100-point or long-term balance limit.  The euro area PMI (Purchasing Managers Index)[2] likewise posted the highest result in 27 months, pointing to expectations for a gradual improvement of the situation. The only negative news are coming out of Russia where the production PMI has been pointing to decreased activity for a third consecutive month.

While the domestic factors do not give rise to any optimism regarding substantial improvement of the situation in the near future, a positive impulse is expected from the possible improvement in the situation in Europe – with the proviso that, along with an improvement in the overall confidence, positive changes will begin also in the real sector of the European economy.