Jawad Saleem
Despite bright headlines and buoyant equity markets, the Pakistani economy is showing worry signals beneath the surface. On the one hand, the stock market index is pushing new highs, and the macro narrative paints a picture of stabilisation. On the other hand, core activity indicators-manufacturing, real incomes and employment-are sending mixed or outright weak signals. Unless these are addressed, the façade of normalcy could mask deeper structural erosion.
The large scale manufacturing (LSM) sector, a key driver of industrial growth, ended fiscal year 2024-25 with a contraction of 0.74 per cent. Even though for March 2025 the year on year growth was 1.79 per cent, that gain was offset by month on month declines and a broadly weak trend. In June 2025, while output rose 4.14 per cent year on year (a welcome number), the month on month output fell 3.67 per cent relative to May. What this shows is a fragile recovery: positive YoY drift but patchy momentum, vulnerable to shocks in domestic demand, energy costs and global trade.
Compounding this, the purchasing managers’ index (PMI) for manufacturing has drifted into the low 50s-a range that signals expansion but only marginally so, and with clear signs of headwinds. The S&P Global / HBL Bank “HBL Pakistan Manufacturing PMI” slid to 50.1 in August 2025, marking the weakest reading since the series began. The drop reflected weaker new orders, including export orders, and lower employment-classic signs of demand weakness and cost pressures rather than a robust up cycle.
Viewed together, the weakness in LSM and the flat PMI contrast sharply with the narrative of rebound. They suggest that Pakistani manufacturing is not yet enjoying a broad based upswing: many firms face weak domestic demand, rising inputs (energy, credit, raw materials) and external headwinds. Parallel to the industrial picture, consumer price inflation has re accelerated: after a lull at 3.0 per cent in August 2025, headline CPI jumped to 5.6 per cent year on year in September. Month on month CPI rose 2.0 per cent in September, reversing the previous month’s decline. In such a context, even if the nominal inflation rate remains moderate by Pakistan’s recent history, the real purchasing power of households is coming under pressure. When industrial activity is weak and jobs are fragile, rising inflation eats into already thin buffers.
In the real estate domain, while official comprehensive data are hard to come by, anecdotal and semi official sources suggest some uptick in sentiment following earlier interest rate cuts. But real estate demand is finely balanced: higher food and energy costs reduce household discretionary capacity; manufacturing job weakness reduces new buyer flows; and the recent floods in agricultural zones (Punjab & Sindh) will likely raise risk perceptions and reduce mobility. The combination of real income squeeze, weaker industrial job growth and agricultural shocks means the housing and land bubble remains vulnerable.
Agriculture and textiles-as major employment and export earning sectors-offer further grounds for concern. While reliable monthly numbers for employment are lacking, multiple reports underscore that the cotton crop has been hit both by yield declines and floods; the United States Department of Agriculture (USDA) cut Pakistan’s 2025/26 cotton output estimate to 4.8 million bales (-4 per cent) in some estimates. Textile manufacturing, which relies on cotton input and global demand, is particularly exposed. Export order softness, rising gas/electricity costs and supply chain disruption from floods all point to tightening margins in the sector. Export data for August/September shows declines in many textile sub categories, compounding the challenge of gaining external balance.
The equity market return story is similarly mixed. The KSE 100 index pushed toward 150,000-152,000 territory, reflecting investor hopes of stabilisation, policy rate cuts and liquidity flows. However, such stock market strength may reflect anticipated reforms, credit flows and external financing, rather than a broad based revival of industrial margins or labour market strength. The divide between financial market optimism and real economy realities is now a key vulnerability: when real incomes, job growth and manufacturing output remain weak, equity valuations become more fragile to disappointment.
Employment remains a critical blind spot. The official unemployment rate (latest available) is 6.338 per cent (2021 estimate). More recent labour force survey (LFS) data have not been publicly released, leaving analysts forced to extrapolate from proxies such as PMI employment sub-indices, LSM job flows and sectoral anecdotes. The unemployment rate may well be higher in practice, given shrinking manufacturing job flows, agri disruptions and real income pressure. Without timely LFS numbers, the risk is that job market weakness remains underthe radar until the next full survey.
These interlinked weaknesses raise several fundamental concerns. First, the industrial cycle, rather than rolling over into strong expansion, appears stuck in a “flat to shallow growth” trap-weak demand, rising costs and competitive pressures keep firms cautious. Second, inflation is moderating only slowly and now appears to be creeping back, eating into household buffers. Third, sectors that employ large numbers of people (manufacturing, textiles, agriculture, and real estate) are showing stress or weak momentum. Fourth, the disconnect between headline stabilisation (in reserves, external deficit, or growth forecasts) and on ground realities (jobs, margins, industrial output) risks undermining reform legitimacy and market confidence.
Further, when sectors such as textiles and agriculture are weak, Pakistan’s export base remains vulnerable. Export contraction implies slower foreign exchange earnings, which in turn raises the pressure on import financing, reserves and the external account. When manufacturing job flows shrink, household incomes fall, reducing domestic demand and thereby feeding back into further manufacturing softness-a negative feedback loop.
In terms of real estate and credit, the squeeze in household purchasing power means fewer entrants into the buyer pool; the earlier policy rate cuts may need offsetting by rate stability or even increases if inflation reaccelerates further. And when uncertainties (floods, energy costs, global demand) mount, investors in real estate may pause rather than commit, dampening the hoped for boost from property.
What does this mean for policymakers and readers of the national economy A few imperatives stand out. The national policy narrative must shift from “macro balance achieved” to “deep structural repair underway”. Managing the external sector and stabilising reserves are necessary but not sufficient; industrial revival, job creation and real incomes must be central. That means targeted interventions: boosting manufacturing competitiveness (via reliable energy input, lowering cost of capital, promoting value added exports), strengthening textile and agriculture supply chains (with flood resilience, input subsidy rationalisation, cotton yield improvement), and improving labour market information infrastructure (release LFS, track employment flows). The real estate sector needs monitoring, not hype-policy must guard against speculative excesses even while unlocking housing demand via credit and income growth. Lastly, inflation must be watched not just on headline numbers but on real income terms: even moderate inflation in a low growth job environment is corrosive.
To be continued
