August 3, 2022.
The information was prepared by Laimdota Komare, Swedbank Latvija economist.
According to the data of the Central Statistics Office (CSB), the volume of production in the manufacturing industry increased by 3.1% in June compared to June of last year (calendar-corrected data at comparable prices). This is the slowest rise in four months and a sign that high production costs, supply challenges and swings in demand are beginning to weigh on the industry’s performance. High inflation adversely affects the purchasing power of citizens throughout Europe, and it becomes more difficult for companies to transfer the increase in production costs to the buyer without harming demand and, accordingly, production volumes in the future.
As reported by CSB, the production of pharmaceutical basic substances and pharmaceutical preparations increased its output the fastest. Sharp double-digit increases were also recorded in metal manufacturing, other vehicle manufacturing, auto parts and accessories manufacturing, textile manufacturing, and beverage manufacturing. Although the increase in production volume was recorded in almost half of the industries, and in some it was even measured in double digits, the overall performance of the manufacturing industry was limited the most by a 10% drop in the largest sub-sector of the manufacturing industry – woodworking. In June, large sub-sectors such as food production, non-metallic mineral production (mostly various construction materials) stumbled and experienced a slight drop in output.
The woodworking industry is likely to be adversely affected by sluggish demand. Although orders have not been growing as much in recent months, it cannot be said that there is a lack of orders either. However, the slowdown in construction activity is affecting the decline in demand for construction products such as lumber and OSB. The demand for do-it-yourself segment products, which had previously soared in both Europe and the US during the recession, is also shrinking. Challenges for the industry arise not only from the weakening of demand in certain product groups, but also from the availability of raw materials. In addition, with Russian and Belarusian wood becoming unavailable to the European market, many buyers increased demand to fill warehouses, fearing further price increases. Now that warehouses are full, we see a slackening in demand. However, the demand for certain products is still rolling forward. As the heating season approaches and concerns about gas sufficiency increase, there is an increased and panic-driven demand for firewood – firewood and wood chips, as well as pellets. Stocks are created not only for this heating season, but for the next one as well. Although in the first half of 2022, the volume of output of woodworking companies grew by only 3% on average, thanks to the ability to transfer the increase in price to the buyers’ price, the turnover of companies in the industry grew by 24%.
The mood of the entrepreneurs of the manufacturing industry of the Eurozone decreased in both summer months – both in June and also in July. The Purchasing Managers’ Index (PMI) has fallen to a 25-month low, signaling that manufacturing output may have already begun to decline in the euro zone’s largest countries. The results of the July surveys show that the volumes of new orders have decreased sharply, and the stocks of finished goods have also increased. The companies cited cancellation of orders by customers, that is, manufacturers’ stocks were not bought out. Geopolitical risks and expectations of high inflation previously contributed to an increase in customer inventories, so the need for new products flattened out in the summer. Confidence indicators compiled by the European Commission and CSB show that the mood of Latvian producers has also slightly deteriorated.
Economic growth is slowing down not only in Latvia, but everywhere in the world. The war started by Russia in Ukraine, the approaching recession in the USA, the troubles of the Chinese real estate market and the restrictions of the pandemic are not the best background. The source of the new geopolitical tension is the complex trilateral US-China-Taiwan relationship, the development of which is being followed by the whole world. A strained relationship could have a negative impact on more technologically sophisticated industries, as global production of servers and microchips could fall victim.
Falling demand, high prices and limited availability of production components are the main stumbling blocks for the manufacturing industry, as a result of which we are likely to see a decline in production volumes in the coming months.
Additional information:
Laimdota Komare
Swedbank Latvija economist
Phone: +371 67 444 213
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