06.11.2019.

The manufacturing sector is facing a period of challenges

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The weakening external demand continues to weigh on the performance of manufacturing, with the fight for export markets becoming increasingly fiercer and the rise in domestic demand also slowing down.

Despite all that, the performance of the manufacturing sector in the third quarter could be even considered as relatively good since it has slightly improved by 0.4% quarter-on-quarter. In annual terms, however, the growth rate is modest (1.5%), which is not surprising, given the contracting output in the wood industry.

Following the euphoria of the "fat years", as the people working in the sector tend to compare, the wood industry is being hit by a number of negative factors, such as winds and rains, bark beetles in Europe followed by a drop in prices, different ups and downs in demand, dumping prices of the competitors and Brexit-related stock building. Unfortunately, industry experts estimate that the fourth quarter will also face a lot of challenges and project that the activity of wood industry and logging will decelerate even more. Despite that, sector representatives promise to weather the headwinds by using the savings made during the last few years. It is fair to say, however, that the situation varies widely across wood industry segments, and the manufacturers of products with higher value added are doing quite well due to the availability of much cheaper raw materials and the improvement of corporate profitability.

Wood industry is the largest manufacturing subsector (see Chart 1 for the output share (%) of the sectors in brackets); therefore, it is quite logical that the sector has come under the spotlight in the given situation. How are other subsectors doing? The development of food production, the second largest subsector, is rather stagnating, and sizeable investment made in recent years has not improved the situation either. At the same time, encouraging development is still observed in the high-tech sectors, i.e. the manufacture of computers, electronic and electric equipment and other machinery, as well as the manufacture of metal products. However, according to industrial confidence indicators (the European Commission data), the assessment of export orders of these sectors shows a contraction, and this might point to a loss of growth momentum in the near future.

Overall, it may be concluded that the manufacturing sector will get into fierce competition at the end of this year and next year. Therefore, it will be forced to seek out new markets over a geographically wider area.

Chart 1 Volume indices of manufacturing subsectors (Q3 2019; year-on-year; %; output weights; %)

Volume indices of manufacturing subsectors
Source: CSB

Chart 2 Manufacturing output (contribution to annual growth; percentage points)

Manufacturing output
Source: CSB data and Latvijas Banka's calculations

 

APA: Rutkovska, A. (2019, 18. nov.). The manufacturing sector is facing a period of challenges. Taken from https://www.macroeconomics.lv/node/4650
MLA: Rutkovska, Agnese. "The manufacturing sector is facing a period of challenges" www.macroeconomics.lv. Tīmeklis. 18.11.2019. <https://www.macroeconomics.lv/node/4650>.

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