Indonesia's February 2014 HSBC manufacturing purchasing managers' index (PMI), which measures the performance of the country's manufacturing industry, slipped to 50.5 from 51.0 in the previous month, thus indicating slowing growth (a reading above 50 indicates expansion in manufacturing activity, while a reading below 50 indicates contraction). Despite continued strong export orders, domestic demand weakened amid massive floods and volcanic eruptions at the start of the year.
These natural disasters, causing disturbances to logistics networks and pushing inflation to 1.07 percent in January 2014, managed to curb manufacturing production in February. Nonetheless, the second month of the year was the fifth consecutive month of growth in terms of new orders.
HSBC economist Su Sian Lim said that another factor that led to slowing manufacturing growth was Bank Indonesia's tighter monetary policy. Between June and November 2013, the central bank raised its benchmark interest gradually from 5.75 percent to 7.50 percent. Tighter monetary policy was needed last year to combat high inflation, limit the country's wide current account deficit and reduce pressures on the sharply depreciating Indonesian rupiah exchange rate. Higher inflation implies higher production costs for manufacturers and these costs are then passed on to consumers.
In 2013, growth of Indonesia's large and midsized manufacturing industry was recorded at 5.64 percent, led by growth of the automotive, metal goods and food products industries. This year, the Ministry of Industry targets a 6.6 percent growth rate.
¹ government target
Source: Ministry of Industry