Credit rating agency S&P Global recorded Indonesia’s Manufacturing Purchasing Managers’ Index (PMI) at 47.4 in May 2025. Although an increase from April’s PMI of 46.7, the index still indicates that the country’s manufacturing sector remains in contraction. 

S&P Global Market Intelligence economist, Usamah Bhatti, stated that Indonesia’s manufacturing economy declined at a moderate pace in May. It marked the sharpest drop in new orders in nearly four years, which led to a solid reduction in production volumes. 

“Exports also continued to decline, while firms worked to adjust inventories and purchasing levels in response to weak demand conditions,” he said, as quoted on Monday, June 2. 

According to S&P data, the latest survey showed a drop in new orders in May – the second decline in recent months and the steepest since August 2021. 

Companies often attributed the decline to stagnant market demand and falling customer orders. International demand also kept declining, albeit at a slower pace, with producers specifically reporting reduced exports to the United States. 

Weakening new orders led to continued drops in production levels during May. Output saw a solid decrease for the second consecutive month, although the rate of decline slightly eased compared to the previous month. In response to operational declines, companies scaled back input purchases as buying activity contracted for a second straight month. 

Firms also reported efforts to reduce both pre- and post-production inventories used for manufacturing and fulfilling incoming orders, given persistent demand stagnation. Despite the reduced demand for inputs, average delivery times lengthened for the ninth month, due to poor weather conditions and delivery delays. 

Companies Increase Workforce Absorption 

Nevertheless, Usamah noted that companies are confident the downturn will pass, as they have increased hiring. Firms have raised employment levels five times in the past six months in preparation for a demand rebound. 

“Confidence in the 12-month output forecast has also strengthened,” he said. 

Additionally, the added capacity has helped companies reduce outstanding work, although the rate of backlog reduction improved from April. On pricing, cost inflation surged sharply in May, marking its first acceleration in three months. Panelists cited a broad increase in raw material prices as the reason for the rising cost burden. 

However, companies made efforts to absorb these costs and even offered discounts to stimulate demand. As a result, output prices rose only modestly – reflecting the lowest rate of output price inflation in eight months of expansion. 

This article is published in partnership with Katadata 

Original article here