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International Internet Magazine. Baltic States news & analytics Friday, 29.03.2024, 01:41

Manufacturing in Latvia continues to underpin economic growth

Igors Kasjanovs economist, Latvijas Banka, www.macroeconomics.lv, 11.05.2017.Print version
At the end of the first quarter, manufacturing has once again posted growth. Thus, in the first quarter of 2017, manufacturing output increased by 6.7% year-on-year, which is a very good result and a crucial contribution to accelerating gross domestic product (GDP) growth.

According to the data of the Central Statistical Bureau, the amount of manufacturing output increased by 2.4% month-on-month (at constant prices, seasonal effects excluded) in March. Year-on-year growth rate remained high at 7.4% (working-day adjusted data). The contribution of the energy sector also deserves mention. Month-on-month, output dropped by 3.1%, whereas y-o-y, a substantial increase in output  by 19.1% – was observed. This was a result of a productive period in electrical power manufacturing – the spring flood in Latvia coincided with a colder period in Scandinavia, which allowed us to take a full advantage of our geography and export electrical power. 


As usual, the m-o-m performance of the individual sub-branches does not tell us much about  trends, for their fluctuations tend to balance out when viewed from the vantage point of several months.  In the context of the first quarter, those sub-branches deserve praise that are rarely mentioned as engines for the main sector: the production of computers, electronic and optical equipment, electrical equipment, various mechanisms and automobiles and their parts. A solid year-on-year growth was also posted by fabricated metal product output, which, combined with good construction material production data, support the increased vigour of the activity in construction mentioned in the GDP data. The data also indicate a substantial growth in the production of wearing apparel; the branch, judging by output amounts, is relatively small, and therefore the opening of a single factory carries much weight. A negative mention has to be made of the largest sub-branch of manufacturing, the wood industry: the data of both February and March have turned out to be very unconvincing, posting only a slight growth year-on-year. Industry representatives, however, deny any fundamental change, so in the coming months we will probably see more growth in the branch, though possibly not as fast as in previous years.


The year 2017 has brought much hope to manufacturing and the coming months also look good. A gradual improvement is felt in the external environment, borne out also by the results posted by Latvian manufacturers as well as their replies to a confidence survey conducted by the European Commission.  It should be highlighted in the latest survey that both the amount of orders and the amount of output expected in the future have reached heights seldom seen in recent times. The projected capacity utilization has also achieved another record.


Only 37.4% manufacturers mention the lack of demand as an important limiting factor (this indicator was as low only in the pre-crisis period). The percentage of those manufacturers (16.6%) who admit attraction of labour as a serious factor limiting growth has been gradually on the rise. Historically, this indicator is not very high (there have been times, when almost every other manufacturer has mentioned this factor as significant). What does it mean? It would be too hasty to suggest that manufacturing generally suffers from a lack of workforce – instead, it is still a skill mismatch between the labour supply and demand, combined with regional disproportions. In the coming years wages are expected to continue to rise in the sector. Consequently, manufacturers have to determine on account of what this rise can be ensured. The manufacturers who currently enjoy higher profit margins may consider redistributing added value for the benefit of employees (in short redistributing profits from employer to employee). Others will have to think about ways of raising productivity and profitability.


Just as other economic participants, manufacturers are also turning their sights in the direction of the potential tax reform.  From conversations with manufacturers, one main view was predominant: it is most important for them to be able to plan their future and consequently, clear decisions are necessary regarding what and when will be done in order to make long-term 






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