Indonesia's Nikkei manufacturing purchasing managers' index (PMI) grew to a reading of 50.4 in November 2017, slightly improving from 50.1 in the preceding month when broad stagnation was detected. A reading above 50.0 indicates expansion in the manufacturing sector, while a reading below 50.0 indicates contraction. Indonesia's November manufacturing growth was primarily caused by accelerating expansion in output and new orders.
But despite rising manufacturing activity, Indonesian firms continued to reduce staffing levels amid reports of ongoing spare capacity. Moreover, these firms had to face sharper cost pressures as input prices rose steepest since June 2017. Part of these higher costs were passed on to customers by raising the average selling prices. They could not pass on all costs due to the price-sensitive Indonesian customers.
Production in Indonesia's manufacturing sector rose for the second straight month in November, supported by further gains in new orders. New orders rose at the strongest pace in three months. Growth, albeit modest, occurred on the back of rising demand from customers at home and abroad (new export orders in fact rose for the fourth consecutive month).
There was also evidence of ongoing spare capacity in Indonesia's manufacturing sector as backlogs continued to drop last month. Moreover, the rate of depletion accelerated to the fastest in five months. Hence, firms continued to layoff employees, albeit at a modest pace.
Local manufacturing firms reduced their purchasing activity modestly in November as they used existing inventories. As a result, pre-production stocks were depleted for the fifth consecutive month.
Several firms said there was a lack of raw materials at vendors. Scarcity of raw materials caused input costs to rise. The rate of output price inflation picked up from October's 14-month low to the strongest since August, but was modest overall.
Aashna Dodhia, economist at IHS Markit, said that following a broad stagnation in the previous survey period, it was uplifting to observe a slight improvement in the health of Indonesia's manufacturing sector in November. This was underpinned by stronger expansions in output and new orders, though the rates of increase were modest overall.
Underlying data indicated that other key PMI indicators dragged on the sector's performance. On the jobs front, manufacturers continued to reduce their staffing levels amid reports of spare capacity in the sector. Currency weakness relative to the US dollar and a lack of raw materials manifested into the sharpest increase in input costs since mid-2017. This further weighed on firms' margins as they were unable to fully pass on higher cost burdens to price-sensitive customers.
On a positive note, the degree of business confidence towards the 12-month outlook for output was bolstered to the strongest in three months, despite being relatively weak in comparison to historical standards.
Manufacturing PMI Indonesia: