Manufacturing Industry Decline in the Baltics: Insights and Analysis

In Latvia, the output of the manufacturing industry in April was 8.8% lower than a year ago. Currently, the decline in production can be observed throughout the Baltics, which stands out negatively against the background of the rest of Europe this year. In Lithuania, production in the manufacturing industry fell by 7.5% year-on-year in April, and by 14.7% in Estonia.

The largest reducing effect on the production volume in April was caused by the wood industry, whose output decreased by 16.1% year-on-year, and the furniture production directly related to it decreased by 14.4%. In both, the long-predicted crisis continues, the main cause of which is the housing market cycle in Western Europe and the United States. The food industry plays its typical stabilizing role (0.0%), while electronics and several engineering industries try to counteract the negative neutral influence of traditional industries.

Electronics manufacturers increased production by 24.3%, electrical technicians by 19%, and equipment manufacturers by even 32.7%. Other vehicle industry figures are not disclosed, but one can guess that these companies are generally doing very well. In the 2nd quarter, this industry’s assessment of the number of months of production provided by the order portfolio grew by leaps and bounds from three to ten. Statisticians don’t provide data on what’s going on in the companies, but knowing the structure and the forces driving the development of this industry, one would think that this is an order for a particularly impressive drone armada. Another highly technological sector returned to growth in April – the chemical industry, which grew by 4.8% compared to last April.

Such a crisis full of opposites can end in two ways. Conditionally modern (conditionally, because woodworking can also be modern) industries continue to grow, increase their share and thus have a decisive influence on the overall dynamics of production. Conditionally, traditional industries may return to growth. Both things can happen at the same time and then the industrial performance will be excellent. There is good hope that we will see it next year, but until then we still have to live. Unfortunately, a rapid improvement of the situation is not expected in the coming months.

Can we hope that at least the bottom of the pendulum movement has been reached and the upswing will begin? The results of certain company surveys allow us to hope so, but we cannot be sure of it. A relatively favorable impression is created when evaluating the order evaluation data, in the 2nd quarter the order adequacy index, expressed in months of production volume, increased from 4.1 months to 4.5 months. In addition to the vehicles already mentioned, notable increases have been recorded in clothing manufacturing and metalworking.

However, there are also circumstances that suggest that production will continue to be dormant until the end of the year. In May, the overall industrial sentiment deteriorated significantly. Production expectations turned negative after five months in the positive zone. The assessment of the volume of orders in the monthly data has not changed significantly for six months and is slightly below the historical norm. Also, the macro-economic picture and the logic of the business cycle do not allow us to hope for a return to growth this year. In the Eurozone, short-term interest rates are still rising, as the ECB wants, in an effort to reduce inflation. This unfortunately happens through a slowdown in economic activity, but industry is one of the biggest sufferers as it is a cyclical sector. Latvian and Baltic industry is also particularly closely related to construction, which is affected by the housing market crisis in several important export markets.

What is happening can be described as the continuation of the pendulum movements caused by the pandemic. Between the middle of 2020 and the beginning of 2022, the pendulum of demand for goods was pushed in one direction – everyone needed goods, volumes could be increased, but especially prices. At the moment, consumers want more services, the negative impact of changes in the economic structure is reinforced by the ECB’s belated fight with inflation. The falling amount of broad money and raw material prices allow us to ask the question whether the battle has not been essentially won and the ECB is not exaggerating, but this is not a comment on monetary policy.