Large Scale Manufacturing (LSM) grew by 5.46 percent in Jul-Oct period. “At a time when the global economy is in a deep recession, industry is driving economic growth and recovery in Pakistan,” Hammad Azhar, Minister for Industries & Production, proudly tweeted yesterday. But if he would have gotten the right memo, his tweet would have read: ‘LSM is up 5.5 percent but only thanks to few exceptions; we need to do more’.
Let’s take a look at those exceptions; and there aren’t many. Among the heavy weights of LSM index, the biggest jump is visible in cement whose domestic production is at record ever highs. In 4MFY21, cement production has shot up by 23.5 percent, largely on account of construction sector. This narrative is corroborated by 30 percent growth in billets/ingots which are used in production of construction bars. Another exception is the 19 percent growth in cigarette manufacturing during the four-month period, which is intriguing given growing informality in the sector as is being flagged of late by domestic formal sector cigarette industry.
If one shaves off the phenomenal growth in these two construction sectors (credits due to federal government for which) and the inexplicable growth in cigarette sticks, then the LSM growth stops looking as pretty as the minister boasted about yesterday.
In fact, whilst in 4-month terms the fall in large scale production – i.e. the breadth of weakness - isn’t as broad based as was the case in the comparable period last year, on monthly basis the fall in LSM production items was much broader in October 2020 compared to September 2020. This begs the question whether or not the recovery seen in September 2020 is sustainable, especially considering the second wave of pandemic is affecting demand at home and abroad.
As argued in BR Research’s last month’s coverage for 1QFY20 LSM data, there is no doubt that on aggregate basis the first quarter fiscal year 2021 signaled first decent growth after a hiatus of several quarters, which leads one to hope that the worst has probably been left behind. But to be euphoric about it is akin to living in fools’ paradise, when in fact the ongoing growth has more to do with low base affect rather than growth driving policy changes across a wide variety of sectors. That being said, it would be very interesting to see the LSM index reading in December and January 2021 when the base affect wouldn’t be coming to aid as much as is the case so far.