Latvia’s Business Growth Hindered by Weak Economic Activity in Foreign Trade Partner Countries: Bank Economists

Growth in business is not expected in the near future, as it is affected by the weakness of economic activity in foreign trade partner countries, bank economists told the LETA group.

Agnese Puķe, the economist of the Bank of Latvia, explains that “the decrease in output in January put such a big dose of bitterness in the sweet pot of the manufacturing industry” that the small improvement in February and March did not change much .the assessment – the first quarter of the year for the manufacturing industry was down 2.7% compared to the fourth quarter of 2023.

However, the economist admits that it may be too quick to call the business development so far a “skyscraper”, considering the many challenges in the export markets. However, the production increases at the end of last year have now been encouraging for the industry, as well as the improvement of the business sentiment index in the first quarter of this year. In April, however, hope went down a bit.

Economic activity in foreign trade partner countries is still weak, especially in the sector related to the export of construction raw materials, explains Puķe. Also, April survey data of woodworkers, metal structures and building materials producers on lack of demand as the main factor inhibiting activity does not show improvement in general, thus reducing hopes for early growth. In addition, the activity of wood workers has become a “lump shear” in connection with the recent decision of the Constitutional Court, which canceled the changes to the regulations would allow the cutting of smaller diameter trees.

“It is difficult to predict how this issue will be resolved, especially in relation to the logging certificates issued during this period, but for some time, the efforts of the industry will be necessary to to go through this eye,” said Puķe.

However, the construction sector does not have the highest ranking problem in terms of lack of demand, among industries the situation is the most bleak in the printing industry, however, the demand problem has decreased slightly in recent quarters, adds the economist at the Printing Bank. Latvia.

The economist of “Luminor Bank” Pēteris Strautiņš emphasizes that the Latvian industry maintained a positive trend in March compared to the year, which returned in February after an almost continuous decline in the negative area 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 was still down 1%, in January the corresponding indicator was even less than 6.9%.

The beginning of the year was the quarter with the lowest level of production in the period of the mini-crisis of the manufacturing industry, which began when the rest of the economy was freed from the effects of assembly restrictions, explained 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 some optimism or pessimism, but business sentiment as a whole is slightly sadder than average.

The situation in world trade in general is improving slowly, tells Strautiņš. The Organization for Economic Co-operation and Development (OECD) estimates that world trade in goods and services will grow by 2.3% this year and could grow by 3.3% next year, and it was not last year’s figure was only a 1% increase. Measuring trade only by goods, it even decreased by 1.2% last year, the World Trade Organization estimates, but this year it could grow by 2.6%. A rapid turnaround occurred right at the beginning of the year – in February, trade in goods grew by 1.2% year-on-year, compared to a decline of 0.9% in January. Strautiņš believes that there is still room for growth, the average rate in this century was around 4% per year.

However, Latvia is still in the corner of the world with an unusually low economic temperature, the economist admits.

It has already been reported that the volume of industrial production in Latvia in March, compared to March 2023, increased by 0.7% at relative prices according to calendar-adjusted data.

The number of production in the manufacturing industry decreased by 1%, while there was an increase in the supply of electricity and gas by 3.2% and in mining and quarrying – by 25.8%.