Economists’ forecasts: The recovery of growth in industry is not expected soon

However, the economist admits that it might be hasty to call the industrial development to date a “skyscraper”, considering the many challenges in the export markets. However, the output increases at the end of last year have now looked inspiring for the industry, as well as the improvement of industrial sentiment indicator in the first quarter of this year. In April, however, optimism faded a little.

Economic activity in foreign trade partner countries is weak

Economic activity in foreign trade partner countries remains weak, especially in the segment related to the export of construction raw materials, explains Puķe. Also, the April survey data of woodworkers, metal structures and building materials producers on the lack of demand as the main limiting factor of activity does not show an overall improvement, thus diminishing the hopes for an early recovery of growth. In addition, the activity of woodworkers has become a “lumpy mess” in connection with the recently adopted decision of the Constitutional Court, which canceled the amendments to the regulations that allowed the felling of trees of smaller diameter.

“It is difficult to predict how this issue will be resolved, especially in connection with the logging certificates issued during this period, but for some time, the efforts of the industry will be needed to clear this mess,” says Puķe.

However, the construction segment does not have the most highly rated problem of lack of demand, among industries the situation is the most gloomy in the printing industry, however, the demand problem has slightly receded in recent quarters, adds the economist of the Bank of Latvia.

Sub-sectors are not too optimistic

“Luminor Bank” economist Pēteris Strautiņš emphasizes that Latvia’s industry maintained positive dynamics in March compared to the year, which returned in February after almost continuous decline in the negative zone since the middle of 2022. In the manufacturing industry, March was much better than the beginning of the year, but compared to the previous March it still decreased by 1%, in January the corresponding indicator was even minus 6.9%.

The beginning of the year turned out to be the quarter with the lowest production volume during the mini-crisis period of the manufacturing industry, which began when the rest of the economy was freed from the influence of gathering restrictions, explains Strautiņš. According to the economist, there are hopes for a better future, but they will come true gradually. The sentiment indicators of the most important sub-sectors show either slight optimism or pessimism, but the industrial mood as a whole is quite a bit sadder than average.

The situation in world trade in general is slowly improving, informs Strautiņš. The Organization for Economic Co-operation and Development (OECD) predicts that world trade in goods and services will grow by 2.3% this year and could grow by 3.3% next year, while last year’s figure was only an increase of 1%. Measuring trade only with goods, it even decreased by 1.2% last year, the World Trade Organization estimates, but this year it could grow by 2.6%.

Latvia is located in a corner of the world with an unusually low economic temperature

A sharp turnaround occurred right at the beginning of the year – in February, trade in goods grew by 1.2% year-on-year, as opposed to a 0.9% decline in January. Strautiņš believes that there is still room for growth, the typical rate during this century was about 4% per year.

However, Latvia is still in the corner of the world with an unusually low economic temperature, the economist admits. The Baltic States, Poland, Germany and the Nordic countries have been dynamic European economies on average this century. Now, of the countries named, only Poland is doing really well, while Germany and most of the Nordic countries are stagnant. The reasons are, among others, increased competition from China for their mechanical engineering and electronics products, as well as the consequences of the housing boom in Sweden. The situation there will improve very gradually this year and next year, meanwhile in Germany the big risk is the continuation of stagnation.

In the last year, the south of Europe has been surprising with its extraordinary economic strength, but unfortunately we do not trade with them much, the economist admits. In the European Union (EU) as a whole, production is currently quite weak and the picture is not hopeful – the EU industry had the most pessimistic mood in the last year in April.

Relatively good indicators – in beverage production and textile industry

Excluding equipment installation and repair, which is not typical manufacturing, the fastest growing sector in March was the chemical industry (up 13.3%), it also performed well in the first quarter as a whole (up 10.7%). Strautiņš explains that it is characteristic of the chemical industry that its companies work in very different segments, the market of which is driven by drastically different forces. The industry works for such markets as construction, beauty care, household chemicals, transport (auto chemicals and biofuels), agriculture. The production of industrial gases, coal and chemical fibers are also important segments. There are companies (“Biolar”) that synthesize chemicals for other companies in the industry, and still others produce alcohol for the industry.

“Therefore, this industry has the resilience that comes from risk sharing. At the moment, chemistry is the most optimistic of the seven largest sub-sectors, its sentiment overall index is three points higher than the historical average, and the order volume rating is seven points higher,” informs Strautiņš.

The beverage production (plus 8.2%) and the textile industry (plus 7.5%) also performed relatively well in March, but their first quarter as a whole still has a small minus sign compared to the year. The economist can say the same about the production of equipment and machinery, which grew by 5% in March. Food processing is still doing better than manufacturing in general, although the lead is smaller than last year. This sector has the best order rating among the ‘Top7’ sectors, plus 12 points against the historical average.

In automotive and electronics – big minuses

There is still a big drop in production volumes in furniture production (minus 23.3% in March on an annual basis), the quarterly indicator is similar and the deterioration continues compared to the end of last year. As long as the situation in housing construction in export markets does not improve, it is difficult to hope for overcoming the recession, says Strautiņš.

Big minuses in March are also in automobile construction (minus 18.7%) and electronics (minus 15.9%), but these areas have had sharply different indicators in the recent past. The overall figure for the first quarter is also much better in the automotive industry, so these minuses can be counted in the “it happens in life” category. Strautiņš emphasizes that the drop in metal processing by 12.4% is more of a concern – the whole beginning of this year is similar, it is a large industry in itself and a leading indicator for mechanical engineering.