Economic activity in the manufacturing sector expanded in January 2016 at a faster pace than in November 2015, according to company executives surveyed in the MCB Bank Purchasing Managers Index (PMI). The PMI for the month of January registered a value of 64.54, an increase from November's reading of 63.25. As a rule of thumb, a reading of 50 or above indicates that manufacturing activity and the overall economy expanded.
At present, the manufacturing sector appears to be growing at a solid pace with Large-Scale Manufacturing (LSM) increasing on a year-on-year basis by 4.43 percent in the July-November FY16 period, according to Pakistan Bureau of Statistics. Moreover, credit to private sector increased by Rs 339.8 billion during H1-FY16 due to the benefits of monetary easing, improving financial conditions of the corporate sector and a general uplift in business environment in the country, according to the State Bank of Pakistan. Crucially, firms were encouraged to avail credit not only to finance working capital but also fixed investments which will produce further expansion in the manufacturing sector going forward.
On the downside, a weak cotton harvest and declining exports continue to weigh in on growth prospects as highlighted by the International Monetary Fund at the conclusion of the Tenth Review of the Extended Fund Facility (EFF) earlier this month. Pakistan's exports, in particular, have declined by 14.37 percent, in dollar terms from July-January FY16 when compared with the corresponding period of the previous fiscal year, according to the Pakistan Bureau of Statistics.
The January MCB Bank PMI indicates that manufacturing activity continued to grow for the 13th consecutive reading and at a much faster pace compared to November. New orders increased at a faster pace in January, registering an index value of 73.06, compared to 70.56 in November while production level increased 1.94 points to 69.17. With sales and production levels both accelerating further, finished inventories followed a similar trend as manufacturers increased inventories in anticipation of future demand. The inventories index increased from 61.67 to 61.94.
Meanwhile, supplier deliveries were slow at 51.67although these were reported as much faster than November as evidenced by a1.67 points drop from the previous reading. A reading of below 50 indicates faster deliveries and a potential cooling down of the economy and vice versa. Employment in the manufacturing sector also continued to grow further, registering a value of 56.94. The Prices Paid and Prices Received indices both pointed to an overall increase in price levels (with index values above 50 for both) which corroborates with Pakistan's current inflation dynamics. CPI Inflation has experienced a reversal since bottoming out in September 2015 at 1.32 percent YoY and currently stands at 3.32 percent YoY for the month of January. The IMF expects CPI inflation to reach around 4.5% by the end of FY16.
Manufacturing concerns, however, reported that the rate of increase of prices paid had reduced, with the Prices Paid Index falling by 1.39 points to 59.44. In contrast, the rate of increase of prices received remained stable, with the index unchanged at 60.83 from the previous reading.
Overall, the manufacturing sector still remains on a moderate rate of growth and this indicates an uplift of the general economy. Manufacturing PMI serves as a leading indicator of economic activity as health of the manufacturing sector is typically highly correlated with future GDP levels.-PR
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