Exporters are feeling the weakening of external demand

The unfavourable global macroeconomic environment is currently most felt in manufacturing and exports of goods, but industrial growth in the Baltics in 2019 has been significantly faster than elsewhere in the euro area, indicating that the Baltic producers remain competitive. However, this resilience of the industry to the decline in external demand is unlikely to continue in 2020. The volume of new industrial orders have declined significantly and in the second half of 2019 export of goods from the Baltic States have begun to decline compared to 2018. This is most pronounced in Estonia, probably due to its close links with the Finnish and Swedish economies, but similar dynamic is also visible in Latvia and Lithuania.

From January to November 2019, manufacturing output in Lithuania increased by 4.3%, while in Estonia and Latvia by 2.7% and 2.5%, respectively, compared to the corresponding period of 2018. However, the relatively good results are largely due to a strong first half of 2019 and in November only in Lithuania manufacturing output grew by 2.6%, while in Latvia and Estonia it decreased by 0.6% and 3.5% respectively. Manufacture of fabricated metal products, electrical equipment, as well as computers and optical equipment are still the fastest growing manufacturing industries in the Baltics, with output growth of over 10% in almost all of the Baltic countries during 2019. In other sectors, however, the results have been less encouraging and the number of sectors where output declined in 2019 exceeds the number of sectors with increasing output. The good news is that output declines in almost all sectors are relatively small and we cannot speak of a serious crisis in any of these sectors, although the situation in wood processing, with the sharp drop in prices and pest infestations, is the most difficult since the 2008 crisis. The manufacturing industry in the Baltics will continue to face weak external demand in 2020 as well and output growth is unlikely to exceed 2%.

At the same time, export of IT and business services are still the fastest growing sectors in the Baltics, driven by global demand and so far unaffected by the slowdown in manufacturing and global trade as well as trade wars. As a result, exports of ICT services are likely to continue to grow at over 10% per annum and the biggest challenge facing the industry today is labour shortages. Apart from IT services, Lithuania's road haulage exports continue to grow very rapidly, while in Latvia transit cargo volume has fallen sharply in 2019 and rail freight volumes have fallen to their lowest levels since 2002. This is due to the growing capacity of Russian ports, as well as low coal prices in Europe and the long-term outlook for the industry remains very negative.