Large-scale manufacturing (LSM) growth is losing steam, with the cumulative reading for the first two months of FY27 at 1.85 percent, its lowest since June 2025. The more telling signal, however, is not the slowdown alone but the growing concentration of growth in a handful of sectors, even as several large-weight industries struggle to find traction.
The July-August LSM index has reached its highest level for the corresponding period in five years, surpassing the readings for FY22 through FY26. That is encouraging, but the comparison needs perspective. Industrial activity is operating at a higher level than in recent years, yet the recovery remains uneven, with much of the positive contribution coming from sectors benefiting from exceptional export performance, a low base or favourable refining economics.
Wearing apparel continues to lead the way. Tracked through ready-made garment export quantities, the sector accounts for nearly half of the positive contribution to LSM growth. Export volumes have remained strong, and September has extended that momentum: RMG export quantities grew 17.4 percent YoY in 1QFY27. This should keep wearing apparel the largest positive contributor in the September LSM reading, and potentially beyond, provided export volumes hold up.
Automobiles rank second, but the nature of this growth deserves some qualification. Production is rebounding from the exceptionally depressed levels associated with the demand destruction of 2023-2025. The strong year-on-year readings therefore reflect both a recovery in demand and a favourable base. As the comparison base rises through FY27, growth rates are likely to moderate. The more meaningful test will be whether production can sustain its gains as the base effect fades.
Petroleum products have emerged as another major source of support, contributing almost as much to positive LSM growth as automobiles. The improvement reflects higher refinery utilisation, supported by attractive refining margins amid the ongoing Middle East conflict. Stronger product spreads have encouraged refineries to process more crude, translating into higher domestic output. Motor gasoline production in August was the highest recorded for any month. With refining economics still providing an incentive to run plants harder, the sector is likely to remain an important contributor in September as well.
The weakness elsewhere is becoming harder to overlook. The diffusion index now shows 10 sectors in negative territory, the highest count since August 2025. Food was the largest drag in August, as production of ghee and vegetable oil fell sharply. Ghee production dropped to its lowest level in almost a decade, a particularly weak reading for a sector with substantial weight in the LSM basket. The end of the sugar season has also removed a major source of support that had lifted food manufacturing during the second half of FY26.
Chemicals and pharmaceuticals remain under pressure, with supply disruptions and higher input costs weighing on production. The problem is not simply the cost of running factories. While the incremental electricity consumption package has reduced energy costs for industrial users, higher raw-material procurement costs are eroding that relief. Where input costs rise sharply, lower electricity tariffs alone cannot sustain production if demand is too weak to absorb the resulting output.
That is the larger challenge facing manufacturing. Pakistan’s macroeconomic stabilisation is now well documented, with greater exchange-rate stability and a more orderly inflation environment providing a foundation for recovery. But stabilisation is a necessary condition for growth, not a substitute for it. The transmission to household purchasing power, business confidence and final demand takes time, particularly after several years of compressed consumption and investment.
Inflation expectations may be better anchored than they were during the crisis, but the pressure on purchasing power has not disappeared. Nor is a rapid easing in interest rates assured. If borrowing costs remain elevated for longer than previously anticipated, interest-sensitive segments, including construction-related industries and white goods, may struggle to gain meaningful traction in the first half of FY27. Automobiles could also lose some momentum as the base effect narrows and financing conditions continue to constrain demand.
The encouraging part is that industrial energy costs are no longer the overwhelming disadvantage they were in earlier years, and export-oriented manufacturing is showing that production can respond when demand and economics align. But the August numbers suggest that this support has yet to translate into a sufficiently broad recovery.
For now, LSM is likely to remain moderate through at least the first half of FY27. The economy has made progress in stabilisation, but the next phase requires that progress to reach factory floors through stronger demand, more predictable input costs and sustained investment. Until then, a record two-month index can coexist with a manufacturing recovery that remains narrower than the headline suggests.