Manufacturing recession: five quarters and counting

Short of a miracle, Pakistan manufacturing activities had contracted for six straight quarters by the end of December 2019.

Data just released by Pakistan Bureau of Statistics (PBS) shows that manufacturing activities, measured by PBS’s large-scale manufacturing (LSM) index, fell 4.6 percent in November 2019, taking the 5MFY20 number to a negative 5.9 percent. And unless December 2019 saw manufacturing jump to where eagles fly, by this time next month when the PBS releases 1HFY20 data, Pakistan’s large-scale manufacturing would have been in a recession for six quarters in a row.

Back in November 2019, BR Research had flagged that the first year-on-year fall in LSM output was witnessed in 3QFY19, but that the number was too small (negative 0.02%), and not very convincing “given the usual revisions in provisional data releases”. That research note also highlighted that the two quarters hence – i.e. 4QFY19 and now 1QFY20 – had witnessed “relatively bigger quantum of back to back year-on-year production decline of 1.01 percent and 5.62 percent respectively.” (Read BR Research’s Is Pakistan in a manufacturing recession?, Nov 26, 2019)

Here is what has happened since: data revisions. These data revisions are not officially highlighted by the PBS. But thankfully, the central bank obtains revised datasets from the PBS and publishes it on its website every month. These revised datasets show that Pakistan’s manufacturing sector has in fact been in a recession since 1QFY19, and not 3QFY19 as was previously estimated.

Given the broad-based nature of contraction, it’s safe to expect that the government’s LSM growth target of 1.3 percent for FY20 will not be met. And that with government’s development spending on a decline, high interest rates and lower private sector activity amid weakening purchasing power, the contraction in LSM will remain broad based for the rest of the fiscal year.

And while the LSM’s decline in November 2019 was a tad better than that in October 2019, it’s hard to pin down if the fall in LSM has in fact bottomed out. What’s needed perhaps is the return of stimulus economics…only that under tight fiscal constraint and the IMF’s periodic scrutiny, it’s premature to expect a stimulus in budget FY21. Hence, contraction, and counting!