LSM on the rise

Granted that Pakistan’s large-scale manufacturing sector posted its highest first-quarter growth in recent memory. But make no mistake. That phenomenal growth was largely spurred by production increases in the first two months (Jul-Aug). The year-on-year growth in Sep-2017 has lost the steam it promised to hold in the first two months of current fiscal year.

Bulk of this growth comes in the sectors already much discussed in prior months’ coverage of LSM. These sectors include tobacco, cooking oil/ghee, cement, auto sector, and iron & steel. Basically, the consumerism and construction theme. Or, seen from another lens, import-led growth rather than export-oriented growth. (See BR Research column: LSM’s sharp take-off October 30, 2017)

The last time first quarter saw such a growth was in 1QFY14 – i.e. soon after the then newly-elected PML-N had cleared up the circular debt allowing room for improvements in power supply and therefore production kicked-off in some sectors.

Common to 1QFY14 and 1QFY18 is the growth in automobile, iron & steel and cement sectors, although of course the pace of growth seen in the current year is far higher than in the comparable period in FY14. A key difference is that in FY14 export-oriented sectors – textile and footwear – grew much faster in 1QFY14 than in 1QFY18.

Another key factor this year is the rise in cigarette production - cigarette production alone has contributed about 1.9 percentage points to 8.4 percent growth seen in overall LSM in the first quarter. Cigarette production may not see sharp growth in October and November data due to higher base. But that growth can be expected to resume in the months after, since Dec-Mar 2016 was a low production period because of factors other than seasonality.

Back to September numbers. Some of the key sectors have lost steam. For instance, the already slow growing sector, textile, saw year-on-year growth of 0.04 percent in production of cotton yarn in September 2017, down from 0.11 percent year-on-year growth in 2MFY18.

Likewise, growth in cigarette production eased to 66 percent in September compared to a growth of 104 percent in 2MFY18, whereas production of petroleum products halved to 8.5 percent from the growth posted in preceding two months. Production of cooking oil/ghee and cement in fact posted a negative growth in September year-on-year.

Still, overall growth in LSM is decent for now, and full year FY18 LSM growth can be expected to beat last year’s record. (See BR Research column: Is 10-year LSM growth high a moment of hurrah? Aug 23, 2017).

That’s assuming if CPEC-led growth in construction sector continues, and if the recently announced export package triggers an increase in export production, whereas auto production also continues reflecting growth in incomes and perhaps expectations of rate hike in the medium-term that can result in higher financing-led auto sales in the ensuing months. Touchwood!