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Economists: industrial growth is slowing down. Should people brace for drop?

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Looking at the latest industrial output indexes, opinions of various economists tend to lack optimism. Some of them expect negative indexes in the coming months, while some already mention the word recession.

Swedbank economist Laimdota Komare notes that the 0.8% increase in industrial growth in June 2019 is the lowest growth index observed since January 2016. The same is admitted by Citadele bank economist Mārtiņš Āboliņš, who also adds that when compared to the first months of 2019, Latvia’s industrial growth indexes have improved because more favourable weather conditions have helped improve energy production volumes.

Luminor economist Pēteris Strautiņš warns – while so far indexes have been positive, there is still a risk of them falling in the negative zone in the coming months.

Woodworking industry slows down

Komare notes that industry leaders have increased in spite of ‘stingy production output increase’. For example, production volumes of electrical appliances have increased 23.9%. A 19% growth has been recorded for ready-made metallic products, except for vehicles and machinery. Woodworking industry has also experienced a 0.5% production output increase.

Strautiņš warns – news in the coming months may not be positive.

Adversity in Central European woods has contributed to deforestation, providing cheap raw materials for Latvia’s competitors, which also pushes prices down for wooden products, says Strautiņš. Saw log prices, when compared to last year’s highest point, have declined 15-20%. The lowest point has yet to be reached.

Luminor expert says that roundwood availability in the second half of the year may become worse because the prices for firewood reduces the desire of private owners to cut down trees, reducing the flow of wood.

According to Āboliņš, the contribution of the woodworking industry is not very positive when compared to last year.

«A similar situation is observed in Lithuania and Estonia. Basically what happened is what we had predicted in the first half of the year. The tolerance of Baltic industry against external shocks is not unlimited. If the industrial decline in Europe and elsewhere in the world lasts longer, it could further affect our manufacturers,» comments Āboliņš.

Global winds

Komare links the decline of industrial growth rate with the general mood of producers and weak external demand, which is further impacted by concerns over Brexit. The mood in Eurozone’s processing industry is worsened because of declining orders.

«Companies are becoming cautious, they are taking a pause in investments before making the next step. This is why Latvian exporters will have to face additional challenges due to worsening of external demand and intense competition on oversaturated export markets,» says Komare.

Outlooks are not promising

Strautiņš notes that the confidence index among industrial companies in Latvia has worsened. However, the index was on above historically average level on July.

«On the other hand, expectations for production output changes have dropped below the average level since February. The most rapid decline has been observed for product sale prices in the future. Nevertheless, the companies in the industry still have plans to hire more employees, which will be an interesting challenge,» Luminor economist describes the situation in the industry.

The economist admits that in spite of the 5.2% increase of turnover in June and it may seem that manufacturers whose products are intended for the domestic market are not affected by external developments, Latvia’s economic growth is showing signs of slowing. Challenges are also presented by limited workforce supply and the increase of labour costs associated with it, which negatively affects profitability of companies.

Looking at developments in the second half of the year, Āboliņš is not particularly optimistic.

«Production output indexes in the world, especially Europe, continue movement towards recession; new export orders in the world continue dropping and currently there is not a lot of hope for the situation to improve in Q3 or Q4. This means we are sure to observe negatives in Latvia’s industrial production. Total annual growth will definitely not exceed 3%,» comments Citadele Bank economist, adding that the only good news now is that the labour market in Latvia and Europe is strong.

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