Middle East war sends Indonesia's factory boom to sudden reverse

Whilst the index remains just above the 50-point expansion threshold, the steep drop underscores a more troubling slowdown.

Indonesia's manufacturing sector skidded to a near-standstill in March, as the war in the Middle East throttled raw material supplies, hammered demand, and pushed costs to their highest in two years — abruptly ending a four-month run of growth.

Indonesia’s headline S&P Global Manufacturing PMI tumbled to 50.1 in March from 53.8 in February, signalling stagnation in operating conditions. Whilst the index remains just above the 50-point expansion threshold, the steep drop underscores a more troubling slowdown.

Production levels fell for the first time in four months, with the rate of decline the steepest since June 2025. Manufacturers reported that raw material shortages and higher input prices — partly caused by the Middle East conflict and turbulence in the global economy — were behind the pullback.

New orders deteriorated in tandem. Order volumes contracted for the first time in eight months, a marked reversal from the sharp expansion recorded in February, as subdued demand and heightened competition weighed on new business. Export orders, which had risen in February, also fell back.

The supply chain picture darkened considerably. Average supplier lead times lengthened for the sixth successive month, driven by material shortages and shipping delays linked to the Middle East conflict, with delivery delays the most pronounced since October 2021. Firms scrambled to build safety stocks, though their efforts were hampered by the very shortages they were trying to hedge against.

Cost pressures compounded the gloom. Input price inflation reached its highest in exactly two years, broadly attributed to raw material shortages and delivery delays, prompting manufacturers to raise factory gate charges at the fastest pace since June 2022.

With output and sales weakening, firms moved into retrenchment. Employment fell for the second time in three months, and purchasing activity declined for the first time since July 2025. Backlogs of work cleared as capacity pressures eased, whilst unsold finished goods accumulated in warehouses.

S&P Global Market Intelligence economist Usamah Bhatti said the conflict's fingerprints were visible across the entire data set. "According to panel member reports, a key factor behind the malaise at the end of the first quarter was the outbreak of war in the Middle East. Anecdotal evidence suggested the war had placed substantial pressure on the price and supply of raw materials, which weighed on production and demand, but also pushed cost inflation to the highest in two years," he said.

Despite the deterioration, manufacturers held on to a degree of optimism. Business confidence ticked up from February, underpinned by hopes that demand would resume its upward trajectory and that the Middle East conflict would not intensify further — though sentiment remained below the long-run series average.

Bhatti offered a sobering assessment of what the data exposes. "March data highlights the vulnerability of Indonesia's manufacturing economy to the war, notably from a price and supply front," he warned.