Stabilized, but stagnant: the recovery illusion

Economic stabilization has been achieved: inflation is nosediving, interest rates have been cut in half, and the currency remains calm, supported by a primary fiscal surplus and a current account in surplus as well. However, economic growth revival is not in sight, with large-scale manufacturing (LSM) performance remaining extremely poor.

Eight out of the last ten quarters have seen contraction in LSM. In the current fiscal year, total industrial output is still below what it was in 2019.

Eleven of the twenty-two LSM sub-indices are below the levels seen in 2015. According to BR Research calculations, on a seasonally adjusted 12-month rolling basis, juices, leather goods, and motor tyres are all at a 105-month low, cement is at an 82-month low, and iron and steel production is at an eight-year low. And the list goes on.

This is not due to base effects. There is no temporary shock at play. The depth and breadth of the decline are alarming. It appears that the downturn in certain sectors may be permanent, with little chance of recovery in the near future. The question is: why is the economy not reviving?

There are both supply- and demand-side problems. On the supply side, there are deep-rooted issues in cost structures and competitiveness. Chinese dumping is adding to the decline, and this problem is likely to worsen as American tariffs increase uncertainty—possibly leading to greater dumping globally.

Even today, dumping is hurting the textile value chain. “Local PSF (polyester staple fibre) costs us $1.19, while imported PSF from China of the same specs, after adding all costs and duties, lands at $1. That’s why we are using only Chinese PSF for our production,” said a player in the textile value-added sector. “Even without EFS, we are better off using Chinese raw material,” he added.

Textile imports are no longer confined to re-exports; they are now catering to domestic consumption as well. Many fast fashion brands are importing materials for local sales. Even in low-end clothing and footwear, the share of imports is growing. Household products, too, are increasingly Chinese-made.

This flooding of cheap products from China and other countries is likely to grow further as US tariffs redirect exports. It’s an existential threat to many industries that serve domestic demand. Falling power generation is also a factor, partly due to lower industrial consumption, while China’s dumping of solar panels has disrupted the energy mix. Power production in 9MFY25 is the lowest since FY20 and down 12 percent from its FY22 peak. The next big risk is battery flooding, as energy storage enters a disruptive phase.

But the issue isn’t only supply-side. Demand is struggling too—due to high taxation (both direct and indirect), sky-high inflation over the past few years, falling real wages, and a distressed farm economy. The wheat support price fiasco has shaken the rural economy. Farmers are struggling to recover costs. Last year, farmers in Sindh fared better, while many in Punjab faced losses. This year, prices are even lower, and farmer misery is mounting.

That’s eroding rural demand. Urea sales in 3MCY25 are at a six-year low, down 60 percent from last year. Motorcycle sales are weak in rural areas, and so is demand for many other products. Real estate in Multan and surrounding areas is depressed, with few buyers. Even the usual spike in money supply during wheat harvest season is missing.

The demand erosion is real. It partly explains why cyclical sectors like cement, steel, and automobiles are not growing despite falling interest rates. In urban areas, declining real wages are changing lifestyles and shrinking demand.

The current policy mindset needs a reset. Running a current account surplus is being treated as the end goal, rather than a means to an end. Whenever the topic of growth arises, the fear of a balance-of-payments crisis paralyses decision-making. Policymakers have become overly cautious.

This is like managing cholesterol with medication alone, which weakens the body over time—instead of pursuing sustainable lifestyle changes like better diet and exercise. What the economy lacks today is strength, agility, and endurance.

The finance ministry seems content with short-term fixes—balancing books with unsustainably high taxes and celebrating surpluses while real industry bleeds. Without bold structural reforms, recovery will remain a mirage. It’s time for a shift in mindset.

John Maynard Keynes had famously said: “The difficulty lies not so much in developing new ideas as in escaping from old ones.“Pakistan’s policymakers must now escape the comfort of familiar metrics and confront the deeper malaise that’s stifling growth.

Copyright Business Recorder, 2025