Mertsina: Demand in manufacturing expected to improve

TALLINN - Commenting on the latest statistics for the manufacturing industry, Swedbank chief economist Tõnu Mertsina noted that the improvement in demand is expected to continue this year in both domestic and foreign markets, although significant risks remain.

In January, the moderate growth of manufacturing production volume continued, increasing by nearly three percent year-on-year. The largest impact on growth came from increases in the production volumes of wood processing, refined industrial oils, and metal products. Although the manufacturing industry grew as a whole, more than half of its 23 sectors-13, to be exact-were still in decline. The sector's growth was most hindered by food production, which has been declining for several months.

"Sales in the manufacturing industry, a figure that also accounts for price increases, grew by nearly five percent in January, with the growth in sales of goods to the domestic market having a more significant impact. Last year, domestic sales also grew faster than exports, but since the share of exports in sold production is considerably larger at 66 percent, the impact of these two markets was more or less equal," Mertsina said.

According to him, the manufacturing industry emerged from a prolonged decline last year. "Although the production volume of this economic sector increased last year, in January this year it was still nearly 13 percent lower than its peak in April 2022. The number of bankruptcies in the manufacturing industry did decrease last year, but this drop followed a period of higher numbers in 2023-2024, and compared to 2021, the number of bankruptcies was still higher," Mertsina noted.

Since the value added in the manufacturing industry at constant prices increased last year while the number of hours worked decreased, labor productivity saw a strong year-on-year rise. "However, it still remained below the 2021 peak. The increase in productivity mitigates the impact of rising labor costs and helps the manufacturing industry improve its cost-based competitiveness. Consequently, industrial companies' assessment of their competitiveness in foreign markets has so far shown improvement. Foreign demand has also improved, allowing the export volume of goods to grow by four percent last year. The manufacturing industry is, after all, the main goods-exporting sector of the economy," Mertsina said.

This year, according to Mertsina, demand is expected to continue improving in both domestic and foreign markets, but there are many external risks that could worsen this outlook. "Due to the war in the Middle East, energy prices on the world market have risen very quickly at the beginning of the year, especially in the last week. Although they remain below the 2022 peak, they represent a significant additional cost for companies, which could dampen the aforementioned optimism about competitiveness - especially if energy prices remain high for longer. At the same time, energy prices are not rising only in Estonia. Within the manufacturing industry, the share of purchased fuel and energy in total costs is highest in the paper industry, followed at a considerable distance by the production of refined industrial oils, chemical products, and building materials. The smallest share of energy in costs, however, is in the electronics industry," Mertsina said.