Manufacturing recovery to be narrow-based

Textiles, autos, cement to lead as lower interest rates revive activity, say analysts

Pakistan's manufacturing sector appears poised for its strongest recovery in several years, but experts believe the rebound is unlikely to be broad-based. As lower interest rates, easing inflation and improving macroeconomic stability begin to revive business activity, the key question is which industries will emerge as the biggest beneficiaries in FY2026-27.

The spotlight is shifting from whether manufacturing will recover to which sectors will lead the next phase of industrial growth. To answer that question, The Express Tribune reached out to leading analysts and market economists to identify the industries best placed to benefit from the improving economic environment and the risks that could still derail the recovery.

Their initial assessment suggests the rebound is unlikely to be broad-based. Instead, a handful of large-scale manufacturing (LSM) industries are expected to emerge as the principal drivers of industrial output, investment and employment, while others may continue to face competitive and external challenges.

Head of Research at KTrade Fawad Basir said the industrial sector accounted for around 20% of Pakistan's real GDP in FY2025-26, with LSM contributing approximately 9.4% of GDP and representing nearly 47% of total industrial activity. A sustained recovery in LSM, he said, would make a disproportionately large contribution to economic growth through its multiplier effects on investment, employment and ancillary industries.

Basir recalled that LSM expanded by 6.1% year-on-year in April 2026, signalling a cyclical recovery in domestic economic activity, although output fell 8.3% month-on-month due to temporary disruptions caused by geopolitical tensions between the United States and Iran. He expects the recovery to gain momentum in FY2026-27, supported by easing monetary policy, lower financing costs, improving domestic demand and a more favourable global commodity price environment.

He anticipated textiles to grow around 4% on improving export demand and higher capacity utilisation, while petroleum products are expected to expand by 6% as economic activity boosts fuel consumption. Lower borrowing costs are also expected to support cement, iron and steel, automobiles, electrical equipment, chemicals and wearing apparel, with the auto and electrical equipment sectors projected to post particularly strong growth, Basir said.

AKD Securities Director Research Mohammed Awais Ashraf believes the federal budget's incentives could significantly influence the manufacturing landscape during FY2026-27. He said export-oriented industries are likely to benefit from the abolition of Super Tax for companies exporting more than 80% of their output, while lower electricity tariffs on incremental consumption should encourage manufacturers to expand production and strengthen their export footprint.

Ashraf said the relaxation in individual tax rates and the abolition of the 9% surcharge should also support household spending, creating additional demand for consumer-facing industries. He identified oil and gas exploration, consumer durables including electrical appliances, and export-oriented industries among the sectors likely to outperform.

He cautioned, however, that tariff rationalisation on imported goods could intensify competition for domestic manufacturers, particularly in the automobile, chemical and steel sectors, although lower interest rates and improving income levels are still expected to support overall sales growth.

Despite the improving outlook, both economists identified geopolitical uncertainty as the biggest downside risk for manufacturing. Basir said regional tensions had already demonstrated their ability to disrupt industrial production and weaken business confidence. Ashraf likewise identified geopolitical uncertainty as the biggest downside risk, warning that prolonged instability could discourage foreign investment despite Pakistan's improving macroeconomic fundamentals.

However, he said record-high year-end state bank foreign exchange reserves, a comfortable current account position and efforts to reprofile external debt into longer maturities have strengthened Pakistan's investment case. He added that lower electricity and gas prices, along with sustained regional stability, could attract fresh foreign direct investment and further support industrial expansion.

Overall, both analysts believe the manufacturing recovery will hinge on policy continuity and geopolitical stability.

Optimus Capital analyst Agam Kumar said the cement sector and the broader construction value chain were well positioned to perform strongly in FY2026-27 as Pakistan's macroeconomic environment continued to improve. He noted that interest rates fell by around 1,100 basis points during FY2025-26, helping lift local cement dispatches by 9.5% year-on-year to 41.5 million tonnes – the first annual increase after four consecutive years of decline.

He expected the momentum to continue supported by budget measures.