Rapid export growth recorded as the impact of the pandemic wanes

Favourable external conditions contributed to a sharp increase in Latvia’s exports of goods in May 2021. Rapid export growth has continued for the fourth consecutive month, with growth accelerating from 7.0% in February this year to 36.2% in May this year compared with the same month of the previous year. Thus, in the first five months of this year, the value of Latvia’s exports of goods was 18.1% higher than in the corresponding period of the previous year.

Such rapid growth in exports of goods was to be expected. First, the strong increase was driven by the low base of the previous year, particularly in May 2020, when Latvia’s exports of goods declined by 15.8% as a result of the COVID-19 crisis. Second, since February this year, export growth has also been driven by the recovery of the global economy from the effects of the COVID-19 crisis, thereby positively affecting external demand for Latvian goods.

The value of exports of goods is expected to continue increasing in the coming months. However, as base effects fade, the year-on-year growth rate will decrease compared with the increase recorded in May this year, although double-digit growth will persist.

Economic sentiment in the European Union (EU), Latvia’s largest trading partner, has been improving since the beginning of this year and in recent months has even exceeded its pre-pandemic level. Notably, consumer and business confidence is increasing across all EU Member States. Latvia exports almost 70% of the total value of its goods to EU Member States; therefore, increased economic activity in EU Member States will have a positive effect on future export development. This is also reflected in Latvia’s goods export data for recent months. The gradual easing of restrictions aimed at limiting the spread of COVID-19 and more active vaccination both in Europe and in other regions of the world are boosting consumer and business sentiment and economic activity.

An increase in the value of exports of goods was recorded in all goods groups in May this year. The largest contribution to export growth came from a 39.7% increase in exports of wood and articles of wood. An increase in exports of wood and articles of wood was recorded to Germany, the Netherlands and the United States. However, the decisive factor in the growth of this goods group was the increase in wood exports to the United Kingdom, with exports of sawn timber and pellets rising significantly.

Rapid export growth was recorded in the metals and articles thereof goods group, amounting to 63.2% overall compared with May of the previous year. Export growth in this goods group was driven by an increase in exports of iron waste and steel scrap to Turkey.

It should be noted that the growth in exports of goods is also being driven by rising raw material prices. These are affected by the recovery of the global economy, as well as by the restrictions introduced to curb the spread of the coronavirus, which negatively affected production capacity and delivery times. Consequently, supply is recovering more slowly than demand, creating price pressures in certain sectors. Since the beginning of the year, prices of oil, wood, metals and other raw materials have risen sharply on global exchanges. This is also confirmed by producer prices and export unit values in Latvia. Data for May are not yet available, but in April export unit values increased by an average of 8.0% year on year, with the prices of wood, metals and mineral products rising particularly rapidly.

The fastest growth among all goods groups in May this year was recorded for transport vehicles—the exports of this goods group increased by 77.5% over the year. This goods group suffered the most during the COVID-19 crisis, but its export value has now returned to the pre-pandemic level. The largest contribution to the development of transport vehicle exports came from an increase in exports of passenger cars. It should be noted that the export of passenger cars was mainly driven by increased re-exports, as comparable increases were also recorded in the import data.

The dynamics of imports of goods are also important to note, as the import growth rate in April and May this year was even higher than export growth, increasing by 45.7% and 53.7%, respectively, compared with the corresponding month of the previous year. Meanwhile, in the first five months, imports of goods were 20.2% higher than in the corresponding period of 2020. Rapid import growth in recent months indicates that Latvia’s economy is recovering. As domestic consumption increases and construction activity picks up, demand for consumer and capital goods is also rising, thereby boosting imports.

Author:

Ministry of Finance

fm.gov.lv