Since December last year, production volumes in Latvia’s manufacturing industry have grown by 3%. Producer price inflation in Latvia is approaching 20%. The growth of Latvia’s manufacturing industry will exceed 7% this year, informs Mārtiņš Āboliņš, an economist at Citadele Bank.
The period of good growth in Latvian industry continues this year, which is promoted by strong external demand, but the costs of raw materials, transport and other production are growing significantly faster than production volumes this year. According to the information published by the Central Statistical Bureau, in August of this year, compared to August 2020, manufacturing output has grown by 7.9%, however, in recent months the growth rates have become slower. Since December last year, production volumes in Latvia’s manufacturing industry have grown by only 3%, but producer prices in this period have increased by 17%, and annual producer price inflation in Latvia is already approaching 20%.
A sharp rise in prices and a relatively moderate increase in production volumes is currently observed not only in Latvia. For example, physical trade in world trade has not increased since March this year. Demand in global industry is still very strong, but there is not much spare capacity on the production side, especially in some sectors. The situation is further exacerbated by bottlenecks and disruptions in global production and supply chains, as well as local COVID-19 outbreaks and related restrictions in some Southeast Asian countries. Limited supply and strong demand have led to a sharp rise in the prices of raw materials, transport and, in recent weeks, natural gas, electricity and other energy resources in the world, in Europe and in Latvia. As a result, the availability of raw materials is increasingly mentioned in business surveys as a significant factor limiting growth.
In August, similarly to the previous months, growth was recorded in Latvia in almost all sub-sectors of manufacturing. In August, compared to last year, the fastest growth in Latvia was in auto parts (+ 42.7%), chemicals (+ 40.4%), clothing (+ 25.9%), furniture (+ 25.8%), as well as various equipment. (+ 10.7%) production. Also in August, the production of wood products increased by 6.7% and the production of food products also increased by 1.3%. A decrease was observed in paper production (-16.9%) and equipment exhibition (-7.3%).
As in the first half of this year, at the end of the year the development of Latvian industry will mainly depend on external factors. At present, there is no reason to believe that the situation in global production and supply chains could improve rapidly, and global demand for goods is likely to exceed production potential at least until the first half of next year. This means that producer prices will continue to rise and businesses will increasingly be forced to pass on cost increases to consumers in the form of higher prices. Of course, this will also have consequences. Rising inflation will limit both consumer demand and the ability of national and central banks to support economic growth through monetary expansion and large budget deficits. This means that inflation is increasingly becoming a significant risk to economic growth. However, for manufacturers, this is still a time of opportunity. According to my forecasts, the growth of Latvia’s manufacturing industry will exceed 7% this year, and strong external demand will remain at least until the middle of next year.
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