Weak Domestic Demand Blamed as Manufacturing Sector Contracts


JULY 04, 2017

Jakarta. Indonesia's manufacturing industry slipped back into contraction after four months of improvement due to subdued demand that dragged production volumes and jobs down, a Nikkei Indonesia Manufacturing Purchasing Managers' Index, or PMI, survey revealed.

The PMI — a composite of manufacturing output, new orders, exports and employment measures that gives a snapshot of manufacturing business conditions — dropped to 49.5 in June from 50.6 in May. PMI readings above 50 indicate an overall increase in manufacturing output, while readings below 50 indicate a drop.

Wisnu Wardana, an economist at Bank Danamon Indonesia, said the pull back in manufacturing activities in June was a result of declining employment.

The survey found employment continued to drop in June, extending a decline of nine straight months.

"Companies are trying to trim their operation as reflected in the employment data. Consumers are spending less as their purchasing power drops," Wisnu said.

Josua Pardede, an economist at Bank Permata, noted that demand and inflation during Ramadan and Idul Fitri this year were relatively tame compared to previous years.

Indonesia's statistics agency reported annual inflation accelerated slightly to 4.37 percent year-on-year in June from 4.33 percent a month earlier.

"Consumers might hold off on purchases in Ramadan because they expected higher inflation in the second semester caused by the start of a new school year, reduction in gas subsidy and expected inflation before Christmas and New Year," he said.

On the bright side, the number of new businesses from abroad — mainly from Europe and America — rose. Local companies continued to make more purchases in June, which may indicate that local manufacturers "seek to stockpile raw material now as they expect rupiah to go weaker in the second half of this year," Danamon's Wisnu said.

Inventories of raw materials and semi-finished items increased during the month while inventories of finished goods decreased.

Meanwhile, manufacturers faced higher charges and costs for chemicals, food, paper, plastics, rubber and textiles.

Despite the readings, producers maintained a positive 12-month output outlook. IHS Markit forecasts economic growth to hold steady at 5 percent this year, slightly lower compared to the government's 5.1 percent target.

"Survey data brought positive news on trade, with producers noting the fastest rise in new export orders since September 2016," Pollyanna de Lima, an economist at IHS Markit said.