Economic activity in the manufacturing sector expanded in March 2016 at a slower pace than in January, according to company executives surveyed in the MCB Bank Purchasing Managers Index (PMI). The PMI for the month of March registered a value of 63.44, a decrease from January’s reading of 64.54. As a rule of thumb, a reading of 50 or above indicates that manufacturing activity and the overall economy expanded.
At present, the manufacturing sector appears to be growing at a solid pace with Large-Scale Manufacturing (LSM) increasing on a year-on-year basis by 4.12% in the Jul – January FY16 period, according to Pakistan Bureau of Statistics. An accommodative monetary policy has contributed to an uptick in credit to private sector and this is further supported by an increase in fixed investments for the fifth successive quarter according to the Monetary Policy Statement announced by the State Bank of Pakistan on 9th April 2016. With improvements in energy availability and lower input prices, supply conditions for manufacturing firms have also improved. On the downside, however, declining exports continue to weigh in on growth prospects. Pakistan’s exports have declined by 12.92%, in dollar terms from July – March FY16 when compared with the corresponding period of the previous fiscal year, according to the Pakistan Bureau of Statistics.
The March MCB Bank PMI indicates that manufacturing activity continued to grow for the 14th consecutive reading but at a much slower pace compared to January. New orders increased at a faster pace in March, registering an index value of 73.61, compared to 73.06 in January. However, the Production Index decreased 1.67 points to 67.50. Meanwhile, Inventory levels decreased by 2.22 points to 59.72 (previously registered at 61.94). Therefore, even though new orders grew at a faster pace than before, manufacturers were able to fulfill orders using existing inventories to meet the increased demand.
Meanwhile, supplier deliveries were slower at 53.06 compared to an index value of 51.67 in January. A reading of below 50 indicates faster deliveries and a potential cooling down of the economy and vice versa. Employment in the manufacturing sector also grew further, registering a value of 52.78. However, the pace of growth of employment appears to have stalled with the index value dropping by 4.17 points.
The Prices Paid and Prices Received indices both pointed to an overall increase in price levels (with index values above 50 for both) which corroborates with Pakistan’s current inflation dynamics. CPI Inflation has experienced a reversal since bottoming out in September 2015 at 1.32% YoY and currently stands at 3.94% YoY for the month of March. Manufacturing concerns reported that the rate of increase of prices paid has also increased, with the Prices Paid Index increasing by 3.61 points to 63.06. Similarly, the rate of increase of prices received also accelerated, with the index increasing 3.61 points to 64.44.
Overall, the manufacturing sector still remains on a moderate rate of growth and this indicates an uplift of the general economy. Manufacturing PMI serves as a leading indicator of economic activity as health of the manufacturing sector is typically highly correlated with future GDP levels.