Surprises in manufacturing

The amount of manufacturing production in June rose 1.5% month-on-month (seasonally adjusted data): an increase after a drop after the previous two months. Looking from a longer perspective, a cardiogram-like dynamic emerges with a small upward trend. Year-on-year, the amount of production has grown 8.1% (calendar-adjusted data).

In the second quarter, the performance of the manufacturing production can be said to be good, albeit not as convincing as last year and the beginning of the year. It was impacted both by a higher base and a weakening of demand in the external markets. Compared to the first quarter of this year, growth remains positive (+0.9%), yet the rate of growth is quite a bit lower than at the beginning of the year. The influence of the hither base is particularly evident in the annual growth: compared to the second quarter of 2011, the manufacturing output has grown 8.0%; in the first quarter, the growth reached 14.8%.

In the first six month growth was experienced in most of the industrial sub-branches, in some even quite rapid. Growth was most rapid in the production of chemical substances (+33.2%), metals (+32.4%), electrical equipment (+25.8%), automobiles (+24.9%) and fabricated metal products (+23.0%). The repairs and installation of equipment and appliances, which also are included in manufacturing, grew as much as 65.8%. On the other hand, a drop has been experienced in the production of wearing apparel (-7.0%), other transportation vehicles (-5.1%) as well as pharmaceuticals (-11.9%). The data on the latter, however, are still confusing, because the major players do not confirm any negative processes in the demand of production.

Let us take a closer look at two of the major manufacturing branches – wood pulp and wood products as well as foodstuff production, with each contributing about one fifth of the manufacturing output.

The production of wood pulp and wood products has been one of the most rapidly growing sub-branches of industry since the beginning of the crisis. With the higher base, the growth rate is dropping this year, yet in terms of amounts it still is a major contributor to production and export. Based on the data of the full load of production capacity, the sub-branch has still to fulfil its potential: despite important investments in the wood processing industry as of the middle of 2011, the load of production capacity has not lessened, just the opposite, it has continued growing, reaching new records this year.  That invites the supposition that investment has been directed at a renewal of the worn out equipment or that demand maintains an excess over supply, almost leading to a full load of production capacity of equipment and machinery. For the branch to develop further, however, there are other limitations, e.g., the lack of wood pulp felt by the wood producers after the cutting of logging volumes in the national forests. According to branch representatives, the price is not favourable for selling right now, therefore the owners of private forests are not rushing to supply the necessary amount of wood pulp.  That does not permit increasing the production volumes to the extent adequate to demand.

The development of the other largest sub-branch of manufacturing – the production of food products – has not been as successful since the beginning of the crisis. In contrast to the wood industry, the sales of food industry production is directed toward the domestic demand to a greater extent and thus its (especially meat, confectionery, flour and dairy products sales) growth was limited by the weak purchasing power of the population.  That, however, is not the only factor impacting production volumes. Thus, for instance, the processing and canning of fruits and vegetables, oriented in equal amounts toward export and the domestic markets, has increased production volumes at least two times as of 2008.   It is clear that it is not just external demand that is behind such rapid growth but also the ability to increase shares in the external markets. The production of canned fish, on the other hand, of which at least two thirds are exported, has experienced a rather significant drop in production volumes. The fish industry has been experiencing for some time and will still have to experience various obstacles: a lack of fish resources, a reduction of the quotas for fishing in the Baltic sea, changes in the permissible amount of benzopyrene in sprats, limitations in sales to Russia, Belarus and other countries etc.

Looking at the examples from these two major industries we can conclude that next to changes in domestic or external demand, the performance of certain branches is affected also by many specific factors: the availability and prices of raw materials, state subsidies and access to EU funding, changes in legislation, various limitations on trade and often even unfair competitive practices (including those of other countries) etc. Under the impact of all these factors, the total factor of industry can have positive and negative surprises for us that at a first glance even seem to contradict the overall macroeconomic situation. In order to be able to mention only pleasant surprises, the state government and non-governmental organizations have to be ready to involve themselves, quickly and actively, in the protection of Latvian entrepreneurs and achieving legislation favourable to Latvia in international regulations.