The risks to the manufacturing sector in Pakistan appear to be nearly balanced. Low domestic inflation is facilitating access to cheaper raw materials in the local market and declining financing costs are expected to contribute significantly to low mark-up costs and increased profits.
However, declining commodity prices and stagnating demand in the international market has squelched the penchant for and profitability of export production. Although structural bottlenecks such as energy shortages continue to impede the performance of the manufacturing sector, the results of the 10thMCB PMI portend of promising prospects of performance for the manufacturing sector.
The July 2015 MCB PMI at 65.69 indicates a moderately increasing pace of growth in the manufacturing sector, relative to May 2015, as evidenced by an increase of 0.55 points in the MCB PMI reading. As a rule of thumb, a reading above 50 is taken to denote expansion in the manufacturing sector and economy, while a persistent reading below 42 is taken as an indicator of contraction in the overall economy and a precursor to impending recession.
New orders stood at 76.9, an increase of 0.8 points since May 2015. Conversely, however, production levels remained stable at 70.6. Lags and inefficiencies in the supply chain on account of floods in the north and south of Pakistan may have contributed to the increase in the index monitoring delivery time, which increased to 52.8 from 51.7 in May. Additionally, the increase in supplier delivery time could have restrained the possibility of increasing production, in spite of an increase in new orders and a marginal uptick in employment (55.6 in July compared to 55 in May).
A major shift was seen in the index monitoring prices paid, which decreased by 5 points over the given period; in the period covered by the May 2015 Index, the prices paid index had increased by 8.6 points. The prices received index, however, remained stable at 66.1, showing no major change from its value recorded in May. Compared to May 2015 when both indices registered increases in value, the trends witnessed in prices paid and received in July point to an improvement in profit margins for manufacturers.
