Arya News - Indonesia’s manufacturing sector has slipped back into contraction territory as weaker output and employment offset a modest recovery in new orders, according to S&P Global.
JAKARTA – The mood on Indonesian factory floors has soured again as a key indicator slipped back into contraction territory while some ASEAN peers have seen significant improvement.
S&P Global’s Indonesia Manufacturing Purchasing Managers’ Index (PMI) fell to 49.8 in August from 50.2 in July, returning below the 50-point threshold that separates expansion from contraction.
The reading pointed to broadly stable business conditions midway through the third quarter but marked a reversal from the improvement recorded in July. Renewed declines in manufacturing output and employment were the main factors weighing on the sector’s performance.
Companies attributed declining output to stronger competition, subdued demand and higher input costs. Production has now decreased in five of the past six months.
Employment also returned to contraction territory, as some manufacturers cut payrolls in response to lower production requirements, while others struggled to maintain staffing levels amid voluntary resignations. Employment has now declined in five of the past six months.
Demand, however, showed resilience. New orders rose slightly for the first time in three months, with the seasonally adjusted index moving just above the 50-point threshold, indicating broadly stable new work rather than a significant recovery.
Some of the surveyed manufacturers reported improving demand and increased customer requests, but these gains were offset by muted demand, stronger competition and reduced purchasing power among clients.
Backlogs of unfinished work rose for a second consecutive month, although the pace of accumulation eased from July, suggesting continued pressure on manufacturers to process existing orders despite weak production.
Purchasing activity was unchanged in August after five consecutive months of decline. Some firms increased purchases amid higher new orders, while others cut buying due to weak order inflows.
Manufacturers also faced slightly longer delivery times for inputs, although supplier delays remained mild and were only marginally more pronounced than in July.
Maryam Baluch, an economist at S&P Global Market Intelligence, said the latest PMI data pointed to a mild deterioration in the health of Indonesia’s manufacturing sector as renewed declines in output and employment reversed the improvement recorded in the previous month.
“Demand conditions, meanwhile, were broadly neutral,” she said, adding that inflationary pressures had eased further and business confidence continued to recover from its April low.
Manufacturers increased their stocks of purchases for the first time in five months, albeit slightly, as some built safety stocks in anticipation of higher raw material costs.
Post-production inventories, meanwhile, fell for a fourth consecutive month. The pace of decline was moderate but matched the fastest in more than four years, equal to the rate recorded in May 2025.
Inflationary pressures eased further in August, although input prices and output charges remained historically elevated. Higher raw material and supplier costs continued to push up operating expenses, which were often passed on to customers.
Business confidence also strengthened, reaching a seven-month high as manufacturers expected stronger demand and stable market conditions to support higher production over the next 12 months.
Indonesia underperformed in comparison with Southeast Asian manufacturing hubs. The Philippines recorded the strongest expansion in August, with its manufacturing PMI rising sharply to 54.9 from 51.8 in July, while Thailand’s rose to 53.8. Myanmar recorded 50.3 and Malaysia 50.2, making Indonesia the only country among the five to return to contraction territory.
Samuel Sekuritas Indonesia said the August manufacturing PMI was mildly negative for the economy, reinforcing concerns that the sector could weigh on growth amid weak external demand and limited domestic momentum.
“The impact is relatively neutral to slightly negative for government bonds from a growth perspective, while equities remain mixed, particularly for manufacturing names,” the brokerage said in its Economic Update report on Tuesday.
The impact on the rupiah is expected to be limited for now, although further manufacturing contractions could put pressure on the currency.
“Looking ahead, we expect manufacturing activity to remain around the 50 threshold in the near term, depending on domestic demand and global trade conditions,” the report said, adding that weak output and employment suggested a slow and uneven recovery.
The brokerage cited S&P Global Market Intelligence’s projection that Indonesia’s real export growth would slow to 2.5 percent in 2026 from 9.6 percent in 2025, pointing to continued external pressure. It expects growth to be driven primarily by domestic demand and investment.
Meanwhile, Industry Ministry spokesman Febri Hendri Antoni Arief said the marginal decline mainly reflected production adjustments and workforce “efficiency” measures amid intense domestic competition.
He said rising new orders and improved business confidence pointed to optimism among producers and could support a recovery in industrial activity.
The ministry would continue efforts to improve the business climate by facilitating raw material access, strengthening domestic product use, protecting the market from cheap imports and accelerating trade agreements, including the IEU-CEPA.
“With new orders moving toward expansion, easing inflation and broader access to the European market, we believe the manufacturing PMI will return to expansionary territory in the coming months,” Febri said.