Indonesian manufacturing sustains growth despite raw material shortages
The sector expanded as business confidence strengthens.
Indonesia's manufacturing sector closed out 2025 on positive footing, sustaining its expansion for a fifth consecutive month despite raw material scarcity limiting production growth.
The S&P Global Indonesia Manufacturing Purchasing Managers' Index (PMI) remained above the neutral 50.0 mark in December, though it fell from 53.3 in November to 51.2, indicating a softer improvement in business conditions at year-end. A reading above 50 signals expansion, whilst below indicates contraction.
The sustained growth was underpinned by improving new orders and strengthening business optimism, which reached a three-month high, encouraging manufacturers to raise staffing and purchasing levels.
Domestic demand drives growth
Underpinning the expansion in operating conditions was a sustained uptick in new orders. Growth extended into a fifth month, though the pace of increase slowed from November. Firms often mentioned new product launches and higher customer numbers as key factors behind the rise in sales.
Data suggested that the improvement was led by the domestic market, as new export orders were reduced for the fourth month running, highlighting the sector's reliance on internal demand.
Production constrained by material scarcity
The increase in total new orders led to a further rise in production, the second in successive months. That said, raw material scarcity limited the pace of growth and output expanded only marginally, preventing the sector from fully capitalising on improved demand conditions.
Employment and purchasing activity increase
In line with higher demand and production requirements, manufacturers raised employment levels during December. The rate of job creation was slight, having eased from that seen in November, but in line with the average seen over the course of 2025.
Despite increased headcounts, there was still evidence of pressure on capacity as a result of new order growth. As such, firms posted a second successive monthly rise in backlogs of work.
Firms also raised purchasing activity moderately in response to improved market conditions, and looked to expand inventories of pre-production goods to be able to respond to a further rise in demand.
Inventory building accelerates
At the same time, stocks of finished goods increased as manufacturers opted to build stocks to ensure efficient completion of orders. In fact, post-production inventories were accumulated to the joint-largest degree in six years, equal with that seen in July 2024, reflecting strong confidence in future demand.
Supply chain disruptions continue
Some companies noted that delivery delays, partly due to adverse weather, had weighed on vendor performance during December. As a result, suppliers' delivery times lengthened for the third time in as many months, adding to operational challenges.
Price pressures remain robust
On the price front, input cost inflation was sharp in December, but below the survey's long-run average having eased to a four-month low. Higher raw material prices and supply shortages were reportedly behind the latest rise in cost burdens.
Firms responded to higher input costs by raising charges again at the end of 2025, albeit to a lesser extent than a month prior. The rate of output price inflation remained stronger than the average seen over the course of 2025.
Optimism strengthens for 2026
Looking ahead to 2026, Indonesian manufacturers remained optimistic that production volumes would increase over the next 12 months. The degree of confidence picked up to the most pronounced since September, with optimism underpinned by hopes that new product offerings would stimulate increased customer numbers.
Expert analysis
Usamah Bhatti, Economist at S&P Global Market Intelligence, said: "Indonesia's manufacturing sector marked the end of 2025 with a sustained improvement in operating conditions, extending the current period of growth to five months. Firms recorded further modest expansions in new orders, employment and purchasing, though saw production increase only marginally as some companies noted the impact of raw material scarcity.
"The outlook for the coming year also improved, as manufacturers signalled the strongest degree of optimism for three months. As a result of positive expectations, firms looked to raise inventories of both pre- and post-production goods to remain efficient in the production and completion of orders.
"Despite easing on the month, cost inflation remained robust in the Indonesian manufacturing economy. Firms also opted to pass higher costs to clients, with the latest bout of charge inflation stronger than the average seen over the course of 2025."
The data paint a picture of a sector maintaining momentum despite material constraints, with strong domestic demand and rising business confidence providing a solid foundation for continued growth into 2026. However, the sector's ability to accelerate expansion will depend heavily on resolving raw material supply issues and stabilising export markets.
