The shortage of raw materials and rising costs are increasingly hampering the development of Latvian industry, and the increase in the physical volume of production in recent months has been replaced by a sharp rise in prices. According to the information published by the Central Statistical Bureau, in September of this year the output of Latvia’s manufacturing industry was by 6.7% higher than a year ago. This is a good result, and industry is still growing faster than the Latvian economy as a whole, but since April, production volumes in Latvia’s manufacturing industry have grown by only 0.5%.
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Meanwhile, producer prices have risen by 12% since April and annual producer price inflation in Latvia already exceeds the 2008 highest level. Surveys of Latvian producers show that demand is still very strong, and the number of months provided with existing orders in the last quarter of this year has reached a historically high level – 4.5 months, instead of the usual 3-3.5. However, production growth is hampered by a shortage of raw materials and workers, which may also have been affected by the increase in the incidence of Covid-19 among workers.
Also in September, the increase in production volumes compared to last year was observed in almost all industrial sectors, but since the spring the growth rates have significantly decreased in the three largest sectors of Latvian industry. In September, compared to the previous year, food production has grown by only 0.2%, production of wood products – 1.7% and production of finished metal products – 3.7%.
However, other sectors continue to grow strongly. For example, the production of chemical products in September increased by 39.2%, cars and their parts – by 28.8%, various machinery and equipment – by 33.3%, electrical equipment – by 9%, and furniture – by 29%. 6%.
At the same time, the sharp shock to producers now is certainly the sharp rise in energy prices in recent months, which will put even more pressure on inflation and slow down overall economic growth. Already, the financial markets are experiencing a sharp rise in the prices of fertilizers, which will create the next round of effects and make the products of other sectors more expensive, for example, putting even more pressure on food prices. The issue of the impact of rising energy prices on the production of construction materials and their prices is also important to us.
In September, the production of non-metallic minerals, which are mainly made of construction materials, in Latvia decreased by 4.4% compared to last year, but next year the state budget is expected to increase investment by about 25% compared to this year.
However, despite these challenges, the outlook for Latvian industry in the remaining months of this year and early next year is good. The Covid-19 pandemic is not over and access to services is still partially limited. At the same time, governments and central banks continue to support the economy, and there is a lot of money in the world. World trade volumes and world production are now close to or even above pre-pandemic levels. However, demand is very high and production disruptions last year have also reduced stock levels in many areas.
Stocks need to be replenished. This combination – unnaturally strong demand for goods and restocking at the same time – has created the current problems in the world’s production and logistics chains. For example, major ship congestion has occurred in the west coast ports of the United States, although the volume of containers handled there has reached a new record this year.
If demand exceeds supply, then prices must rise. The solution to high prices, on the other hand, is high prices, as they reduce demand and balance it with production opportunities. We can already see that both in Latvia and in the world as a whole there is a large amount of outstanding orders, but new orders are growing more slowly than before.
Next year, economic support measures are expected to be gradually eased, the global demand structure will begin to normalize, price rises will limit demand and the recovery of inventories will not last forever. This suggests that, perhaps in the middle of next year, the growth of Latvian industry could also slow down significantly, and the growth of the manufacturing industry will not exceed 3-4% next year.
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