Manufacturing contraction

Last month’s coverage of Large-Scale Manufacturing (LSM) index flagged that Pakistan is undergoing a manufacturing recession (depending on whose definition one ascribes to) with the last two consecutive quarters – 1QFY20 and 4QFY19 – posting negative growth of 5.6 percent and 1 percent respectively. It so appears that the situation has only worsened. (Read BR Research’s Is Pakistan in a manufacturing recession?, Nov 26, 2019)

Latest numbers reveal that the recession story isn’t over yet. Landing at negative 7.97 percent growth October 2019 has been worst ever October for LSM since FY09, and the same is true for four months ending October 2019, having fallen to negative 6.48 percent.

The outlook doesn’t look too great either. For instance, cotton crop is seen in troubles and that may have a negative impact on local cotton yarn and cloth production, unless imported cotton arrive in time and in at least equal quantities.  Cotton yarn and cloth production and other textile products have about 20 percent of total LSM index. The story for POL products is also similar. Petroleum products have about 5.5 percent weight in the LSM index and its production has been going down owing to refining blues covered earlier in this space.

Of course, if one must catch on the straws of hope, then one could argue that central bank’s Purchasing Managers Index (PMI) improved in October 2019, although still being in the negative zone that shows poor confidence. But October 2019 saw first improvement in the PMI since the SBP began its survey in FY18.

The PMI is a part of SBP’s Business Confidence Survey, conducted at a bi-monthly frequency to obtain the views of senior managers of large companies in the industry and services sector. But based on the reading so far it is difficult to ascertain whether the PMI may be read as a leading indicator of LSM index.

Some may also point in the direction of 9 percent increase in exports in November 2019. But export numbers too have not ever reliably pointed to LSM outlook, since the composition of LSM index does not reflect the country’s export basket. It is high time to improve national statistics!