Domestic Demand Boosts Indonesia's Manufacturing Conditions

Strong domestic demand has caused Indonesian manufacturers to raise production levels, which led to some job creation in July, according to the HSBC Purchasing Managers Index.

Purchasing activity continued to rise, while inflationary pressures remained muted in comparison with historical data.

The headline HSBC Purchasing Managers’ Index (PMITM) – a composite figure designed to give an accurate overview of business conditions in the manufacturing sector – posted 52.7 in July, matching June's survey peak.

The reading indicated that operating conditions continued to improve at a solid rate. New orders increased output for a third successive month in July, and the rate at which companies scaled up production was the highest recorded since the survey began in April 2011.

Amid reports of improving demand, July saw new orders received by Indonesian manufacturers rise, extending the current sequence of growth to ten months.

The rate of expansion of new business remained solid overall, just dipping below the record pace registered in the previous two months.

Fall in new export orders

In contrast, new export orders fell for a second month running in July, with the index posting fractionally below the 50.0 no-change threshold. A number of panel members attributed falling overseas business to a drop in demand from key export clients.

Purchasing activity expanded for an eleventh consecutive month in July. Furthermore, the rate of increase was solid and the second highest of that period.

Survey participants commented on rising demand and subsequent production requirements as the principal factors behind increased buying activity.

Consequently, pre-production inventories rose for a fourth month in succession in July, although the rate of accumulation was moderate. Similarly, post-production stocks held by manufacturing firms increased marginally in July.

Survey responses indicated that delayed collection of goods by clients and anticipation of further growth in demand were commonly associated with increased stock holdings.

Meanwhile, July data showed that employment levels rose for a second month running. Although the pace of job creation was modest, it was the largest rise in workforce numbers since July 2013.

The increased demand for labour as a result of expansions in output and new orders.

"Given the ongoing pressures on Indonesia's trade and current account deficits, this pick-up in domestic activity is not a positive sign," says Su Sian Lim, ASEAN Economist at HSBC.

"Further adding to our concerns are indications that inflation may be edging higher again, with both the input and output price indices up on the month. Bank Indonesia needs to remain vigilant and maintain a hawkish stance.”

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