LSM: brace for impact

If FY20 was supposed to be the year of macroeconomic stabilization, Large Scale Manufacturing (LSM) clearly didn’t get the memo. Let the record show that until February 2020, before Covid-19 properly hit Pakistan’s economy, the performance of Pakistan’s large manufacturers was rather poor in the first eight months of current fiscal year; in fact, poorer than FY19. With the virus striking heavy blows to the economy in March and April, LSM’s performance in FY20 may well follow the path set in FY09.

As cautioned in last month’s LSM coverage sugar production fell about 7.7 percent year-on-year in February 2020, as sharpest growth in the production of that commodity was already posted in December 2019. Keeping in mind that some mills closed mid-way in March, no thanks to the virus, sugar production in March is unlikely to have witnessed higher than last year production. But more details on that later!

Meanwhile, car sales have literally slumped; about 71 percent year-on-year in March 2020, and are unlikely to recover in April 2020. With about 4.9 percent weight in the LSM index that alone will make a huge dent. The story of cement and steel isn’t different. LSM numbers in March 2020 are expected to report about 14 percent fall in cement production, and the construction package announced recently should not be expected to lift steel and cement production at least before June 2020, if at all in the times of corona.

And with falling demand for oil despite a sharp fall in prices, refinery production, which already took a hit (36% down in Feb YoY), will be reflecting a near halt in March and April 2020 data releases. Given its decent weight in the LSM, the fall in POL production will further worsen manufacturing decline. With factories and shops shut, electricity consumption will also be taking a hit, leading to negative hurt GDP growth on that account.

Even before the virus hit Pakistan, the central bank said in its review of 2HFY20 economic performance, that “the bottoming out phase of the industrial sector cannot be determined with any degree of certainty as yet.”  This echoes BR Research’s previously published analyses that “the government’s LSM growth target of 1.3 percent for FY20” was unlikely to be met.

Post-covid GDP forecast by the central bank states that national economic output will fall by 1.5 percent in FY20. The central bank hasn’t shared its detailed sector-wise GDP forecast but suffice to say, don’t be surprised if a never-before drop in production reflects in data releases for March and June 2020. When exhausted of all measures and hope, the only words an airline pilot can say: brace for impact!