Indonesia's manufacturing sector continued to contract in November 2016 (the second straight month of contraction), albeit at a slower pace. Indonesia's Nikkei Manufacturing Purchasing Managers' Index (PMI) climbed to a reading of 49.7 points last month from 48.7 points in October 2016 (a reading above 50.0 signals expansion of the manufacturing sector, while a reading below 50.0 indicates contraction). Contraction in November was largely blamed on subdued demand and floods in parts of Indonesia.

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Again concerns about Indonesia's manufacturing sector flared up after it was reported this morning that the Nikkei Indonesia manufacturing purchasing managers' index (PMI) declined to a reading of 48.7 in October 2016 (dropping significantly from 50.9 in September). It was the first time since July 2016 that Indonesia's manufacturing PMI contracted (a reading below 50.0 signals contraction). Employment, new orders as well as output all contracted in October, while pre-production stocks rose (slightly).

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Good news for Indonesia's manufacturing industry. According to the Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI), compiled by IHS Markit, Indonesia's manufacturing expanded both in terms of new orders and production (albeit at softer rates) in September 2016. Growth of new export orders in fact touched a 46-month high. Indonesia's manufacturing PMI rose to a reading of 50.9 in September, up from 50.4 in the preceding month (a reading above 50.0 indicates expansion).

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The manufacturing industry of Indonesia is in need of a boost as its contribution toward Indonesia's gross domestic product (GDP) has declined from 28.0 percent to 20.8 percent of GDP over the past decade. An underdeveloped manufacturing industry gives rise to a fragile economy as Indonesia remains highly dependent on raw commodity exports and on the services industry. This causes problems in times of low commodity prices and Indonesians' weak purchasing power. Preferably, the manufacturing sector accounts for at least 35 percent of GDP.

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Statistics Indonesia (BPS) announced on Monday (01/08) that Indonesia's inflation rate reached 0.69 percent (m/m) in July 2016, considerably below analysts' forecasts. In fact, the 0.69 percent (m/m) pace is Indonesia's lowest July inflation rate since 2012. On a year-on-year basis, Indonesian inflation eased to a seasonally adjusted 3.21 percent (y/y), from 3.45 percent (y/y) in the preceding month. Meanwhile, Indonesia's manufacturing activity plunged unexpectedly in July.

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Good news from Indonesia's manufacturing sector. Indonesia's Nikkei manufacturing purchasing managers' index (PMI) rose to a reading of 51.9 in June 2016, up from a reading of 50.6 points in the preceding month (a reading above 50.0 indicates expansion in manufacturing activity, while a reading below 50.0 signals contraction). The June reading of 51.9 was the highest reading since July 2014. Furthermore, the strongest expansion in Indonesia's payroll numbers in the survey's history occurred, while buying levels also rose markedly.

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In the first quarter of 2016 Indonesia's manufacturing activity declined 1.34 percent from the fourth quarter of 2015 according to data from Statistics Indonesia (BPS). This decline is primarily caused by weaker growth of the processed tobacco industry (-9.99 percent q/q), rubber & plastic industry (-7.66 percent q/q), paper & paper products industry (-5.73 percent q/q), the motor vehicles, trailers and semi-trailers industry (-4.54 percent q/q), and electrical equipment (-4.13 percent q/q). BPS Head Suryamin said the decline of the tobacco industry was caused by a weak harvest, not because of a rise in the tobacco tax rate.

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Industry players in Jakarta are somewhat relieved after Jakarta Governor Basuki Tjahaja Purnama (Ahok) signalled that he will allow a revision to the mandatory relocation of local industries to designated industrial zones. Based on Regional Regulation No. 1/2014 on Detailed Spatial Planning and Zoning Regulations, all local industries in Jakarta have to be (re)located into the designated industrial zones before 1 January 2017. Ahok is now expected to extend the deadline to the end of 2019.

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After having experienced 17 straight months of contraction in the manufacturing sector, the Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI) survey rose to a reading of 50.6 in March 2016 from 48.7 in the preceding month (a reading above 50 indicates expansion of manufacturing activity) according to a statement released on Friday (01/04). This is very positive news although Indonesia's export performance remains in a state of decline. Manufacturing expansion was primarily caused by a rise in domestic demand.

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On 6 March 2016, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website over the last seven days. Most of the topics involve economic matters such as the performance of the rupiah, February inflation & manufacturing activity, financial sustainability of Indonesia's health insurance program, Sukri bonds, public accountability, natural resources, and more.

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The manufacturing sector is a strategic one for the Indonesian economy (albeit it is facing a number of major challenges). The Indonesian government therefore has high hopes and ambitions for the national manufacturing sector.

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Over the past five decades the Indonesian economy has evolved from one being highly dependent on agriculture to one in which industry and services dominate the national economy.

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Manufacturing activity in Indonesia improved in May 2019 due to an increase in output and new orders. The Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI) rose from 50.4 in April 2019 to 51.6 in the following month, its highest position in nine months (a reading below 50.0 indicates contraction, while a reading above 50.0 indicates expansion in manufacturing activity).

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Although conditions remain challenging, there is some room for optimism as manufacturing activity in Indonesia reportedly climbed in the last month of 2018. In December 2018 the Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI) rose to a reading of 51.2, up from 50.4 in the previous month (a reading over 50 indicates expansion in the nation’s manufacturing sector, while a reading below 50 points at contraction).

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Based on the latest data from IHS Markit, the headline seasonally adjusted Nikkei Indonesia Manufacturing Purchasing Managers’ Index (PMI) fell modestly to a reading of 50.5 in October 2018 (from 50.7 in the preceding month). The reading represents a marginal improvement in the health of Indonesia’s manufacturing sector.

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Manufacturing activity in Indonesia expanded in September 2018. However, the pace of growth slowed compared to the preceding month. The Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI) declined from August's 26-month high of 51.9 to 50.7 in September (a reading of 50.0 separates contraction from expansion in the manufacturing sector).

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Rising domestic demand caused Indonesia's August manufacturing activity to grow at the fastest pace in more than two years. As a result local manufacturing companies added new people to their staff. The headline seasonally adjusted Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI) grew to 51.9 in August 2018 (up from 50.5 in the preceding month), further above the 50.0 level that separates expansion from contraction in terms of manufacturing activity.

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Although manufacturing activity in Indonesia rose slightly in July 2018, there are a number of reasons to be concerned. The headline seasonally adjusted Nikkei Indonesia Manufacturing Purchasing Managers' Index (PMI) indeed grew modestly from a reading of 50.3 in June to 50.5 in July (a reading of 50.0 separates contraction from expansion in the nation's manufacturing activity). However, overall conditions remain lacklustre in Southeast Asia's largest economy.

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The Indonesia Nikkei Manufacturing Purchasing Managers Index (PMI) showed a slight improvement to a reading of 51.7 in May 2018, up from 51.6 in the preceding month, meaning that activity in Indonesia's manufacturing sector expanded last month (a reading above 50.0 indicates expansion, while one below 50.0 indicates contraction). The PMI index measures the activity level of purchasing managers in the manufacturing sector. This survey is closely watched as purchasing managers usually have early access to data about their company's performance, which can be a leading indicator of overall economic performance.

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The Indonesian government officially launched the roadmap called "Making Indonesia 4.0" earlier this week. Industry 4.0 is a term that refers to the fourth industrial revolution in manufacturing and industry. It includes major innovations in the digital technology, biology and hardware automations, and also implies that cyber-physical systems can make their own basic decisions, hence becoming increasingly self-ruling.

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