A Steeper Domestic Producer Price Decline to Spur Exports

In December month-on-month, producer prices picked up 0.4%, primarily recording a rise in the prices of goods for domestic market. The price level of the latter had been moving down for the last 13 months, and the current rise was triggered mainly by supply factors, increasing purchase prices for food products, milk in particular, and more expensive articles of wood.

Producer prices were on a downward trend for both goods sold in the domestic market and those exported, on average by 4.7% lower than in 2008, due to weak domestic demand and cost reductions of the last year.

With the foreign demand recovering and the global natural resources becoming more expensive again, last year the producer price contractions for exported output were relatively smaller than for domestically sold goods, the latter, in turn, affected by a dramatic plummeting in the domestic demand and reduced labour costs. As prices in the domestic market are likely to fall at a relatively faster pace, businesses are expected to find extra stimuli for re-orienting production to external markets, thereby boosting the share of exports in the economy.

In addition, the real effective exchange rate of the lats whose calculation builds on producer prices in manufacturing, since the beginning of the last year had depreciated, to record a drop of 6.1% in October. The real effective exchange rate is an indicator of the economy's ability to compete while its decline signals improvements in external competitiveness primarily triggered by lower production costs, labour costs in particular.

While the domestic demand remains weak, the downward pressure on producer prices in the domestic market is expected to continue in the near future, with supply factors albeit acting as an obstacle.