While most macroeconomic indicators have improved in the past few months, and the authorities are increasingly confident of having achieved stability, large-scale industrial activity briefly joined the trend before diverging. The Large-Scale Manufacturing (LSM) index declined for the second consecutive month, with September posting a year-on-year negative growth of 1.93 percent.
On a cumulative basis, 1QFY25 LSM is back in the red at a negative 0.76 percent, after two quarters of positive growth. Cumulative LSM growth is at its lowest since December 2023. Notably, this marks the third consecutive first quarter of LSM recording negative growth first in at least 20 years. The inability to register even a low-base revival for three straight years underscores how severely industrial activity has been set back over the past two-and-a-bit years.
In terms of sectoral contribution, the diffusion index has fallen below 50, with 12 of the 22 LSM sectors tracked by PBS for index computation reporting negative year-on-year growth during 1QFY25, compared to just 8 last month. This is worse than 1QFY24, where sectoral distribution was evenly split. To grasp the extent of the decline in key sectors, consider that 10 of the 22 sectors now have a lower index value than FY16 when the base was reset.
Wearing apparel (ready-made garment export) remains the single-largest positive contributor, accounting for nearly two-thirds of all positive contributions in 1QFY25. After over a year of inconsistencies, PBS has finally corrected the anomalies, and the PBS export and LSM numbers now reconcile. More good news is expected next month, as provisional ready-made export quantities for 4MFY25 are estimated to continue their growth trajectory, rising 20 percent year-on-year. Wearing apparel is set to remain the largest growth contributor to LSM through much of 2QFY25 as well.
The two- and three-wheeler automobile segment has recovered from last year’s lows, with October sales numbers showing promise as interest rates are expected to trend downward for much of the remaining FY25. However, it is important to note that automobile production is still far from historic heights and will require significant effort to return to those levels. That said, the worst appears to be behind us.
Food sector output has remained stable without significant deviation, with much depending on sugar crop output, which will shape 2QFY25 sectoral growth. Oil, rice, wheat, and carbonated drinks have all performed well. Food, textiles, and automobiles are showing positive trends and could become leading contributors, alongside export-oriented sectors, in FY25. Nonetheless, the erosion of purchasing power over the past two years will keep growth modest and gradual.
Food production has grown at a steady pace, and any significant deviation in either direction will depend on sugar crushing, which will begin reflecting more prominently from November onwards. Construction-related industries continue to face severe pressure, as easing interest rates and headline inflation are unlikely to boost housing demand, given the purchasing power erosion of the past 24–30 months. Federal and provincial governments have also scaled back PSDP budgets for FY25 to allocate more for subsidies, which is expected to constrain production in cement, steel, and related industries.
With LSM sectors carrying considerably higher weights on the positive side, 2QFY25 should witness better growth than 1QFY25. However, any recovery is likely to remain slow and modest, as a new set of energy (captive power) challenges looms for industries at the turn of the year.
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