PMI Indonesia in September 2024: What Caused the Contraction in the Manufacturing Sector?

Thu, 17 Oct 2024 08:21 | News | Editorial INTI

Jakarta, INTI - The latest Indonesian Manufacturing PMI report for September 2024 reveals worrying signs for the economy. The PMI index, which measures the health of the manufacturing sector, fell to 48.4, indicating a contraction. This marks the fourth consecutive month that the index has been below 50, which signals that manufacturing activity is shrinking. This decline reflects various internal and external challenges faced by the sector. The figure also shows a significant drop compared to January 2024, when the PMI was in expansion territory at 51.1.

Demand-Side Challenges: Weak Domestic and Export Markets

One of the main factors leading to the PMI contraction is the weakening demand in both domestic and international markets. In September, new orders were recorded at 48.6, down from 48.9 in August, signaling that customer demand continues to decline.

Export demand also showed no significant improvement. The export orders index was recorded at 46.1, slightly higher than the previous month's 45.8 but still far from the expansion zone. Weak demand from global markets, particularly in key export destinations like the United States and Europe, has significantly impacted export-reliant industries such as textiles, automotive, and electronics.

Rising Raw Material Prices and Their Impact on Production

In addition to weak demand, Indonesia’s manufacturing sector is also grappling with rising production costs. Raw material prices have surged significantly since early 2024, largely driven by fluctuations in the rupiah against the US dollar and disruptions in global supply chains. This has led to increased production costs for companies, but at the same time, they are struggling to raise their product prices due to the drop in consumer purchasing power.

In September, the input price index was recorded at 57.2, slightly lower than the 57.8 in August but still indicating a significant upward trend in prices. Companies relying on imported raw materials, such as those in the chemical and pharmaceutical manufacturing sectors, are particularly affected. On the other hand, output prices, or selling prices, were recorded at 50.8, indicating that companies are finding it difficult to transfer the burden of rising production costs onto consumers.

Labor Effects: Slowdown in Hiring

The slowdown in manufacturing activity has also affected employment in the sector. In September, the employment index stood at 48.9, meaning many companies are choosing to pause new hiring or even lay off workers to maintain their business operations. This is an alarming situation, given that the manufacturing sector is one of Indonesia’s largest job creators.

Supply Chain Efficiency and Logistics Challenges

Supplier delivery times have also become a challenge for manufacturing companies. In September, the Supplier Delivery Time Index was recorded at 48.5, indicating slower delivery times from suppliers. This issue is due to various factors, including port delays, transportation inefficiencies, and disruptions in the logistics distribution chain due to the lingering effects of the COVID-19 pandemic.

Rising logistics costs are also burdening the sector. The cost of shipping goods from abroad, especially from China, has worsened the situation. For example, the cost of shipping containers from China to Indonesia has increased by 12% compared to last year, adding more pressure on manufacturing companies that rely on imported raw materials.

Looking Ahead: What Needs to Be Done?

With the ongoing uncertainty, Indonesia's manufacturing sector requires government support to recover. One solution could be to offer tax incentives to companies most affected by rising production costs and supply chain disruptions. Additionally, investing in logistics infrastructure, such as building new ports or modernizing transport facilities, is critical to reducing shipping times and distribution costs.

The government should also consider providing financial support to small and medium enterprises (SMEs) in the manufacturing sector, which are particularly vulnerable to market fluctuations. Low-interest loans or capital assistance could help SMEs struggling to keep their operations running amid challenging economic conditions.

Indonesia’s PMI remaining below 50 in September 2024 indicates that the manufacturing sector is still under pressure. Weak demand, rising raw material costs, and logistics challenges are the main factors contributing to this contraction. However, with the right policies and government support, there is hope for a recovery in the coming months. Improving supply chain efficiency, providing incentives for companies, and investing in logistics infrastructure are key steps to accelerating the recovery of Indonesia's manufacturing sector.