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International Internet Magazine. Baltic States news & analytics Thursday, 21.06.2018, 16:41

Manufacturing retains its high level in Latvia

Igors Kasjanovs economist, Latvijas Banka,, 05.04.2017.Print version
In February, the performance of manufacturing remained at approximately the previous month's level (+0.4%, seasonally adjusted data). However, in evaluating this result we must remember that the achieved level is rather high, as evidenced by the y-o-y growth (+4.6%).

Even though the overall performance of the sector has not significantly changed, substantial changes have taken place within it. Negative y-o-y growth was observed in two of the biggest branches   – food (-4.2%) and wood industry (-1.0%). In both, this is partially explained by the base effect, i.e. fast output growth was observed in February 2016.

The weak result in the aforementioned branches was compensated by fast growth in others – the production of computers and electrical and optical equipment (+34.8%), production of equipment and mechanisms (+15.7%), and production of automobiles and trailers (+17.4%). Both in the chemical industry (+24.7%) and production of wearing apparel (+13.9%), it was a month of solid performance.

This month does not represent a turning point in the development of the sector. Fluctuations in various branches by month can be quite substantial. It can be expected that in the coming months, growth will be furthered by the traditional branches.

February also turned out well for the energy sector, which was determined by a substantial increase in cogeneration stations. Operational data point to March being an even more successful month. Therefore, it can be said with some certainty that the energy sector will make a relatively substantial and positive contribution to the growth of gross domestic product (GDP) in the first quarter of 2017.

The demand-side factors at the beginning of the year look hopeful for manufacturing. Indicators for both domestic confidence and foreign trade partners are at a high level. Domestic demand should be on the rise this year as well, resulting from a stronger performance of the construction branch (at least those branches that are related to construction – metalworking, construction materials, mining and quarrying, and, to a lesser extent, the wood industry). It can be expected that at least the demand side is favourable for further growth in the branch.

There is less clarity regarding supply side in industry. Judging by non-financial investment statistics, the amount of investment in the sector in 2016 was the lowest in the post-crisis period. Year-on-year, the amount of nonfinancial investment decreased by 27.1%. This is partly related to interruptions in the availability of financing from European Union (EU) structural funds. Aware that soon substantial financing from the EU structural funds will become available, enterprises apparently postpone the already scheduled investment projects. Yet that is not the only reason. 

Investment activity is also impeded by the uncertainty that has dominated the external environment (the Russian sanctions and recession, Brexit, elections in the U.S. and its future policies, etc.). It makes planning more difficult for export-oriented businesses. The less than clear tax policy of previous years has also impeded investment activity. The businesses in the energy-intensive industrial branches, in their turn, awaited solutions regarding high energy tariffs.

2016 was a very good year for manufacturing. Despite the weakness of the demand side, growth was very strong. It might seem that the weak investment activity could create problems if demand-side stimulus is substantially renewed. It cannot be fully disregarded, yet the situation is very varied by branch and by enterprise.

There are a number of enterprises that have no problem increasing output, for the investments of previous years provided for a reserve capacity. This is borne out by the full load capacity data aggregated by the European Commission; even though the full load production capacity is at a historical high, it substantially lags behind the indicators of other countries.  

Even though the total amount of non-financial investment diminished in 2016, a number of factories have opened in Latvia in the last six years, for example a plastic factory in Ventspils, a wearing-apparel production unit in Tukums, an oat processing plant in Dobele, an electronics production unit in Ventspils, a number of plants/shops in the wood industry, etc. All of them will have a favourable impact both on total production capacity and output in 2017. As a result, there are no current strong signals that the supply side could impede further growth in the branch. However, a resumption in investment activity is vitally important for manufacturing to be able to post as good a growth in the medium term as up to now.  

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