Why Indonesia’s Manufacturing Activity Contracted in June 2017

The Nikkei Manufacturing PMI in Indonesia (EIDO) fell to 49.5 in June 2017 from 50.6 in May 2017. Factory activity experienced its first drop in the last four months as output fell for the first time during the same period.

The decrease in manufacturing activity in June mainly resulted from sluggish domestic orders. The chart below illustrates Indonesia’s manufacturing activity over the last year.

Manufacturing activity in Indonesia contracted in June 2017, as its PMI fell below the critical level of 50. Indonesian (IDX) manufacturing worsened in June, mainly due to subdued demand conditions that led to lower production volumes and losses within the sector.

However, the new export orders picked up the pace in June 2017. The total new work orders remained the same as in May.

The global (ACWI) growth appears to be supporting economic activity in Indonesia in 2017. The new business from international markets increased mainly from regions like Europe (VGK) and the US (SPY). The new export orders in June 2017 in Indonesia experienced the fastest growth in the last six years.

Buying activity decreased in June 2017, although at a slower pace for the first time in the last four months. Employment dropped for nine straight months through June 2017, but the pace of contraction remained marginal.

Despite President Joko Widodo’s fiscal reforms, domestic demand remained weak and resulted in reduced output and employment in June 2017. However, the Indonesian (EEM) manufacturing PMI average for the first half of 2017 remained in expansionary territory despite the recent decline.

The manufacturing activity above the critical 50 mark indicates expansion, which could provide a stronger contribution to GDP growth in Indonesia in 2017. According to the July IHS Markit report, the 2017 economic growth forecast held steady at 5.0%.

Let’s look at the manufacturing activity in Greece in our next article.