The LSM surprise

All but four months of FY21 saw the LSM monthly indices at highest ever values. That is surely a first. The LSM growth for FY21 at 14.85 percent has surprised many observers, as June 2021 LSM growth clocked in at 18.41 percent year-on-year. Recall that Pakistan had lifted the lockdown by June 2020 and activities had gradually started to pick up, with one or two exceptions. The base impact was not as pronounced as it was for April and May.

The June index at 145 is 15 percent clear of 5-year average from FY15-FY19 of 126. This is the single largest monthly increase over 5-year average for any month in FY21. The provisional numbers now take the LSM growth 500 basis points clear of the numbers used for GDP estimation two months ago. Assuming there is no downward revision in agriculture growth estimate, Pakistan will be looking at revised FY21 GDP numbers of 4.5 percent.

Uptick in economic activities is ever-so-evident, yet it remains shy of the highs achieved earlier. While petrol consumption hit the highest ever, diesel consumption has remained largely range bound, and significantly lower than the peak. Diesel consumption is often considered a barometer for movement of goods, and that suggests the central bank’s assertion that there still remains an output gap in the economy has merit.

Automobile, cement, and steel sectors lead the way for obvious reasons. Apart from the low base due to Covid, the three sectors have benefitted greatly from substantially reduced interest rates from last year. Automobiles have particularly benefitted the most from reduced interest rates. A number of incentives offered in the recent budget should keep the momentum going, as prices have come down while the government takes a hit on carious duties and taxes.

The construction industry has been singled out by the government as the driving force towards economic growth. The low-cost housing scheme at subsidized rate of financing has kept the momentum in cement, steel, glass, paint, and other allied industries. Whether or not the plan to construct 5 million houses sees the light of the day, achieving even a fifth of it should generate sizeable industrial activity in the aforementioned sectors, and that has so far shown in the pace of growth.

Textile players have reportedly entered expansion phase, and availability of cheap financing for export-oriented sectors should help the sector growth stay in double-digits. Much improved availability of feedstock gas for fertilizer production has led to increase in fertilizer production, after years of static growth. As imported gas is now made available for the purpose, there is no reason why the higher level of fertilizer production cannot be sustained.

Wheat and sugar have been the clear winners in the food category, for different reasons. More mills are believed to be now reporting data, which may explain some of the growth, but 42 percent year-on-year growth surely does do beyond that. All in all, industrial activity appears to be on sound footing, but repeating the growth of FY21 would not be easy, given the much higher base. That said, there is still room for growth, as evident from broad-based recovery month after month.