The Large Scale Manufacturing (LSM) index for August 2024 was down 2.65 percent year-and-year and served as an early reminder for all and sundry that the path to recovery will not be a straightforward one. This also registers the biggest monthly drop in LSM in 10 months. On a cumulative basis, the LSM growth has turned negative for the first time in six months, indicating the recovery will be patchy and gradual. All of this comes from a very low base – thanks to the horror show of the past two years.
The cumulative 2MFY25 LSM reading is the lowest since FY17, excluding the Covid-effected July and August periods of 2020. In terms of sectoral contribution, the diffusion index posts a much-improved picture from the best part of the last 24 months. Fourteen of the 22 LSM sectors tracked by the PBS for index computation returned positive year-on-year growth during 2MFY25.
The combined basket weight of sectors in the negative territory for July 2024 is close to 17 percent – similar to July. The biggest drag comes from the furniture segment, down 54 percent year-on-year, with a cumulative negative impact of 1.85. The furniture sector with a basket weight of just 0.51 percent is not necessarily a big cause of concern, as the newly inducted category tracks the quantity of furniture exports – that does not even get close to $1 million per month. For such a sector to be the largest contributor to negative growth does not ring alarm bells.
The lull in construction activities on both private and public scales continues to show in the industrial output of the cement and steel sectors. Cement production in August, for instance, is even lower than the 10-year monthly average of 3.1 million tons, and with a considerable basket weight close to 5 percent, the impact on LSM is significant. The cigarette manufacturing activity has also struggled to rebound despite a significantly low base – and the monthly output for the past few months has remained two-thirds or thereabouts of the 10-year average.
The largest positive contribution once again came from the wearing apparel sector where readymade export quantities are used to compute the index value. And as a refreshing surprise, PBS gets it right this time, after many months of unexplained anomalies of numbers not adding up. The readymade garment export quantities have been the highlight of Pakistan’s textile export in the past few months – and the LSM contribution shows as much.
The heavyweight textile sector with the largest contribution to the LSM basket has finally come out of the rut, posting 4 percent year-on-year growth. That said, the year-on-year growth is only a reflection of the depths the sector had tanked to, as the output of cotton yarn and cotton cloth is still 20 percent shy of the 10-year monthly average, and the index is still lower than the base period of 2015-16.
There are encouraging early signs emerging from the automobile and wearing segments, as both have reported strong growth for September 2024, which should keep 1QFY25 LSM growth strong, barring exceptional decline in any other key sectors. The reversal of the interest rate cycle is widely expected to bring some life back to automobile demand, and September production numbers may well be the starting point of the much-anticipated rebound.
Food sector output has stayed strong without much deviation, and much will depend on sugar crop output that will shape up the 2QFY25 sectoral growth. Oil, rice, wheat, and carbonated drinks have all held on pretty well. Food, textiles, and automobiles are all looking up and could well be the leading contributors alongside exporting sectors for FY25. All said the erosion in purchasing power over the past two years will keep the growth honest. Expect the recovery to be modest and gradual.
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