War-driven price surge pushes Indonesia’s manufacturing into first contraction in nine months

Output fell at its fastest pace in nearly a year as input costs surge to 4-year high.

Indonesia's manufacturing sector contracted for the first time in nine months in April, as the war in the Middle East drove raw material costs to their highest level in four years and selling prices to their steepest rise in more than a decade — squeezing production and eroding consumer purchasing power.

The S&P Global Indonesia Manufacturing PMI fell to 49.1 in April from 50.1 in March, dipping below the 50-point threshold that separates expansion from contraction for the first time since last July. The reading pointed to a marginal but meaningful deterioration in operating conditions at the start of the second quarter.

Output volumes contracted solidly, marking the second consecutive monthly decline and the sharpest fall since May last year. Manufacturers widely attributed the drop to rising raw material prices, supply shortages and weakening customer purchasing power — all linked in large part to disruptions caused by the Middle East conflict. Delivery times lengthened for the seventh consecutive month, as the war continued to weigh on vendor performance and the timely movement of materials.

With production requirements softening, firms trimmed purchasing activity and shed jobs at the most rapid pace in ten months, though the rate of redundancies remained modest. Backlogs of work fell further, suggesting some easing of capacity pressure even as conditions overall worsened. Pre-production inventories declined as manufacturers drew on existing reserves to sustain output, while stocks of finished goods rose as unsold products were placed into storage.

The inflationary picture was stark. Input cost inflation accelerated to the highest rate in exactly four years, driven by surging raw material prices and widespread material scarcity. Firms responded by raising charges to customers at the fastest pace since October 2013 — a 12-and-a-half-year high — passing on the bulk of their higher expenses.

New orders offered a sliver of relief, edging up marginally on the month. However, analysts cautioned that the improvement was misleading: survey evidence suggested the uptick was largely driven by clients placing advance orders to protect themselves against further price rises and supply disruption rather than any genuine strengthening of demand. Export orders told a clearer story, falling solidly as overseas customers pulled back.

Business confidence remained positive in net terms but weakened to its lowest level in five months. Manufacturers cited hopes for new product launches and a swift end to the Middle East conflict as reasons for optimism, but a growing number expressed concern that the war could be prolonged, with lasting consequences for supply chains and prices.

Usamah Bhatti, economist at S&P Global Market Intelligence, said the April data showed the war beginning to bite in earnest across Indonesian industry. "Price pressures surged in April, with the rate of cost inflation jumping to the highest since April 2022," he said. Higher expenses were increasingly being passed on to clients, he noted, resulting in the steepest rise in selling prices for 12-and-a-half years. On the apparent recovery in new orders, he was cautious: "Survey evidence suggested that this was often due to clients making advanced purchases ahead of further potential disruption from the conflict."

The S&P Global Indonesia Manufacturing PMI is compiled from monthly surveys of around 400 purchasing managers and serves as one of the earliest available indicators of economic conditions across South-East Asia's largest economy.