Indonesian factories return to growth in July as demand steadies

Output rose for the first time since February as new orders stabilise.

Indonesia’s manufacturing sector edged back into expansion at the start of the third quarter, according to the latest S&P Global survey, as a steadying in new orders allowed factories to lift production for the first time in five months.

The headline S&P Global Indonesia Manufacturing PMI climbed to 50.2 in July from 46.9 in June, moving back above the 50 threshold that separates growth from contraction.

Firms reported that a renewed, if only marginal, rise in output followed four consecutive months of decline, with panellists pointing to tentative signs of improving demand and stronger client confidence. A more forceful recovery, however, was held in check by continued increases in the cost of raw materials.

New order volumes stabilised over the month after a marked contraction in June, with some firms citing renewed project launches and improved client sentiment. That was tempered by stiffer competition for business and by higher prices, which appeared to dampen demand elsewhere. Export orders proved a weaker spot, falling for a fifth straight month.

As demand levelled off, capacity pressures built, pushing backlogs of work up at their fastest pace since November. That in turn prompted manufacturers to raise headcounts for the first time in five months, albeit only slightly, even as they ran down post-production stocks to help meet orders.

Purchasing activity fell for a fifth consecutive month, which firms linked to elevated input costs and tight supply, whilst pre-production inventories were also trimmed as some manufacturers held off stockpiling amid still-muted order books.

Delivery times for inputs lengthened for a tenth month running, though the slowdown was the mildest of that run, suggesting some easing in supplier bottlenecks. Input price inflation remained marked but eased to its softest in four months; firms blamed higher domestic and imported raw material costs, worsened by a stronger dollar, and largely passed these on through higher factory gate prices.

Usamah Bhatti, economist at S&P Global Market Intelligence, said the survey pointed to a renewed upturn in output tied to steadier order intakes, adding that input cost inflation, while still well above its historical average, had eased to a four-month low — a sign, he suggested, that price pressures may be peaking. He noted that the return to hiring after four months of job losses, alongside firmer confidence about the year ahead, marked further positives, with optimism at its strongest in six months. Some manufacturers, he added, were hoping developments in the Middle East would help ease price pressures further.