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If April 2020 saw Pakistan’s Large-Scale Manufacturing (LSM) index drop the most in recent memory (42 percent), then May 2020 saw the second worst year-on-year fall over at least the last decade: 25 percent. But the good news is that the worst is over. Or at least so it seems.

Data released by Pakistan Bureau of Statistics (PBS) show a recovery in nearly all the major contributors to the LSM index: cotton yarn and cloth, cigarettes, iron & steel, cement, POL products and automotive sector that have a combined weight of about 37 percent – all saw month-on-month recovery in May 2020.

Last month’s LSM coverage highlighted how the index follows a typical seasonal cycle, peaking in March every year on sequential basis, tapering off in the ensuing months until it starts picking up again after July/August. However, it was expected that May 2020 will buck this historical trend, and instead witness recovery as the lockdown had come to an end by May and production activities resumed as is now evidenced by recovery in a host of sectors. Accordingly, BR Research had assumed May 2020 reading to land at 100 points (as against 85.4 points in April 2020), whereas the actual reading for May has landed at 102.9 points as per PBS data release.

However, even after accounting for this slightly better-than-expected reading in May 2020, and the optimistic assumption that June’s LSM index might land at 110 points, the full-year LSM contraction will be around 10.43 percent compared to the government’s provisional estimate of 7.78 percent, making FY20 the worst ever year for large scale manufacturing in Pakistan in at least the last two decades. Accordingly, this will eventually lead to a substantial downward revision in GDP growth estimate for FY20, given that LSM has roughly 10 percent share in total national economic output.

Assuming that the Covid-19 related bottom is behind us, and that Naya Pakistan Housing will finally start this year leading to a take-off in demand for cement, steel and other construction materials, alongside recovery in auto sales expected to be visible by September/October onward on account of lower interest rates, one may expect improvements in LSM in FY21. But while year-on-year growth can be expected to be sharply visible in the second half of FY21 on account of low base affect, the same cannot be said with confidence for the first half. After all, despite the recovery in May 2020, only 18 out of the more than 110 items (tracked by PBS under LSM) reported growth in production. The rest, including all the LSM index heavy weights, still reported huge fall in output. Ergo, it may take a long while before the tides change!