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Indonesia plows ahead despite China’s weakness

Indonesia Manufacturing PMI  2013-05-01Enlarge Graph

Despite China’s slowdown and weakness in the region, Indonesia remains strong and accelerates growth

The Purchasing Managers Index (PMI) is a useful leading indicator of the economic performance of a country. In emerging markets, the manufacturing sector generally has a more centric role in the GDP, so for countries like Indonesia this is one of the main macroeconomic performance metrics.

The PMI is composed of five key elements of the production logistics chain: output, new orders, employment, suppliers’ delivery times and stocks of purchases.

Demand remains resilient

The latest data posted a 51.7 value, up from 51.3 in March. Four out of the five components of the PMI showed improvements.

New orders was the only factor that did not accelerate, though it expanded for the eleventh month in a row.
Additionally, purchasing activity showed a strong increase, pointing to a solid near-term outlook by managers.

Inflation starting to build

Input prices continued to increase as it did in previous months. Output prices seems to be finally catching up, as they posted a strong run up as well.

This means that producers were able to pass on increased costs to consumers, though continued inflation could hurt consumer demand and slow the economy.

The increased inflation comes as no surprise given the strong economic growth in recent months. As long as inflation remains reasonable, then healthy economic growth may continue. If inflation continues its pace, it is likely that the central bank will take action and raise the FASBI rate over the next few months.

Leif Eskesen, HSBC’s Chief Economist for India & ASEAN, said:

“Activity in the manufacturing sector firmed in April led by faster output and employment growth, which outweighed a deceleration in new order flows from, in particular, foreign clients… The numbers suggest that the BI should stand ready to tighten monetary policy to contain inflation pressures.”

Overall, Indonesia remains an oasis of growth amidst meager progress in the region and world in general. As long as inflation holds, there should be room for further growth. Additionally, its growth will accelerate even more as other global trade partners recover and increase demand.