Both global and domestic economic growth remained subdued in the first two months of 2016, hence new orders continued to fall, while unemployment rose. However, several matters give rise to optimism that Indonesia's manufacturing industry will again start to expand in the months ahead. These matters include improving household consumption in Indonesia, expectation of accelerated economic growth in 2016, a stable (or in fact appreciating rupiah exchange rate against the US dollar), persistent low crude oil price (that should cause lower fuel prices in Indonesia), and improving government spending.

Indonesia Manufacturing PMI:

Adhi Lukman, General Chairman of the Indonesian Food and Beverage Association (Gapmmi), said the processed food products sector of Indonesia (which is directly related to household consumption) started to recover at the start of 2016. In 2014 Indonesia's food and beverage sector expanded 9.54 percent year-on-year (y/y). Growth then slowed to 7.54 percent (y/y) in 2015 due to weakening purchasing power. However, Lukman expects the food and beverage sector to accelerate again in 2016. Growth was already detected in the second half of 2015. Whereas in the first half of 2015 growth of Indonesia's food and beverage sector primarily depended on higher prices (producers raised food prices by 10-15 percent at the start of 2015), in the second half of 2015 growth of this sector was supported by increasing sales volumes.

The worst affected sector in 2015 was Indonesia's textile and clothes sector. After growing modestly in 2014 (+1.53 percent y/y), this sector contracted by 4.79 percent (y/y) in 2015. "While Indonesian households continued to spend on food items (a basic necessity), they cut back on spending on textiles," Lukman said. Moreover, those sectors that are focused on supplying foreign demand have been plagued by slowing growth or contraction, including Indonesia's textile industry.

Darodjatun Sanusi, Executive Director of the Indonesia Pharmaceutical Association, said the chemical, pharmaceutical and traditional medicine sector rose strongly (+7.36 percent y/y) in 2015 (from a growth pace of +3.89 percent y/y in the preceding year) supported by the government's National Health Insurance (JKN) program.

Meanwhile, Indonesia's Industry Minister Saleh Husin said he still sees major challenges for Indonesia's manufacturing industry in the year ahead due to sluggish global economic growth and low productivity of Indonesia's human resources. Despite these challenges he believes it is not impossible for this industry to achieve a +6 percent (y/y) growth pace in 2016 (from 5.04 percent y/y in the preceding year).

Indonesia's Manufacturing Industry:

Sector 2014 2015
Food & Beverage 9.54% 7.54%
Tobacco 8.85% 6.43%
Textile & Clothes 1.53% -4.8%
Leather (products) & Footwear 5.51% 3.98%
Wood (products), Bamboo & Rattan 6.07% -1.8%
Paper (products), Printing &
Reproduction of Recorded Media
3.43% -0.1%
Chemicals, Pharmaceuticals &
Traditional Medicines
3.89% 7.36%
Rubber (products) & Plastics 1.16% 5.05%
Nonmetallic Mineral Products 2.39% 6.18%
Primary Metals 5.89% 6.48%
Metal Goods, Computers, Optical
Electronics & Electrical Equipment
2.92% 7.83%
Machinery & Equipment 8.80% 7.49%
Transport Equipment 3.94% 2.33%
Furniture 3.58% 5.00%
Other Manufacturing, Repair and Installation
of Machinery
and Equipment
7.30% 4.89%
Non-Oil & Gas Industry 5.61% 4.89%

Source: Indonesian Industry Ministry