Manufacturing sector expects tighter competition in export markets
In the first half of 2018, weak capacity on the supply side, i.e. insufficient investment and labour shortage, was the main obstacle to manufacturing growth constraining the production output. With higher uncertainty in external markets in the second half of 2018, the economic growth moderated in several euro area countries giving reason to expect tighter competition in those export markets.
Despite growing concern about the sustainability of external demand, no direct impact was observed for the production output at the end of 2018 since a large part of orders were made based on previous contracts. Moreover, the demand was also supported by the domestic market. Thus, the manufacturing sector performed relatively well at the end of the last year. Contrary to the previous quarters with weaker-than-expected results, the fourth quarter of 2018 saw relatively strong growth in manufacturing output posting quarter-on-quarter and year-on-year increases of 2.4% and 4.3% respectively.
The significance of demand and supply factors varies greatly across sub-sectors. For instance, many mechanical engineering and metalworking businesses were not able to meet the external demand mainly owing to the labour shortage. Therefore, at least initially, the decline in external demand will not have a notable impact on those businesses. Meanwhile, the main issues in the food processing sector, the dairy sector in particular, are related to sales and fierce competition which is particularly intense with respect to Latvia's trade networks. As a result, businesses are increasingly focusing on export markets. Moreover, a rise in costs might cause further problems to the food processing businesses, mainly those requiring grain which saw a surge in prices due to the last year's drought and the resulting decline in harvests.
Overall, manufacturing recorded 3.4% growth in 2018, considerably lower than in 2017 (8.2%). The rate of increase is expected to remain relatively moderate at approximately 3% in 2019 as well.
Volume indices of manufacturing sub-sectors in the fourth quarter of 2018 (%; year-on-year; output weights, %)