LSM: postmortem 1Q

It doesn’t take a lot of grey cells to figure out that the growth in Large Scale Manufacturing (LSM) index in 1QFY21 is largely because of the low base affect. Sans some exceptions, first quarter growth over the last eleven years shoots rather sharply if the index had performed poorly in the same period the year before. This year seems no different.

Data from Pakistan Bureau of Statistics reveal that monthly production of key LSM items is still far off from its recent highs. For instance, jeeps and cars may have posted about 40 percent growth in September this year, but it is still down 45 percent from its record ever monthly production in October 2018 or 33 percent lower compared to monthly average of fiscal year 2018. On the contrary, motorcycle production is only down 6 percent compared to monthly average of FY18. Production of LCVs, and trucks are still short 48 percent and 69 percent short of average monthly FY18 production. This may be construed as a sign of squeezing purchasing powers. Or, that lower income category of businesses, those informal sector self-employed players, are growing faster than businesses from the Mehran, Corolla or Civic class, as is often the case in periods of economic slowdown.

Strangely though, whilst cement saw record ever monthly production in September 2020, or about 21 percent higher than FY18 monthly average, production of iron and steel products are still down – down about 5.5 percent year-on-year in 1QFY21 and about 21 percent lower than FY18 monthly average recorded by the PBS. Production of cigarette and POL products is also down 15-17 percent respectively over average monthly production in FY18. The index heavy weights – cotton yarn and cloth - is surely up and closer to average monthly production before FY18. But anyone who follows the LSM knows well that monthly cotton yarn and cloth production flatlined about five years and hasn’t really moved much since. Ergo, don’t expect further growth in these two sectors.
In light of these trends, it’s too soon to crack open the bottle of champaign. Green shoots are all there is at the moment, for which some congratulations may well be had, because the recovery in LSM does seem to be broad based, both in year-on-year terms and also in terms of pre-and-post Covid lockdown period (See tables). Afterall it’s the first noticeable quarterly growth since many seasons.

Going forward, LSM growth should be expected to be more profound, albeit again largely due to low base affect, especially in the last quarter – unless of course second wave of Covid-19 in Pakistan is bigger than the first, forcing the government to impose a far stricter and longer lockdown compared to the one earlier this year. Short of anything such, mathematics should drive LSM growth, even as achieving pre-2018 production peaks will take much longer.