Indonesia’s manufacturing industry closed 2025 on a positive note, sustaining expansion for five consecutive months. Although growth slowed in December, the sector remained above the critical 50-point threshold, signaling resilience amid global and domestic pressures. Rising domestic demand, cautious optimism among businesses, and ongoing supply constraints define the outlook as the nation steps into 2026.
Key Facts & Background
- Purchasing Managers’ Index (PMI):
- December 2025 PMI: 51.2, down from 53.3 in November.
- PMI above 50 indicates expansion; Indonesia has remained in expansionary territory for five consecutive months.
- Drivers of Expansion:
- Moderate growth in new orders, employment, and purchasing activity.
- Production increased only marginally due to raw material shortages.
- Domestic demand supported new orders, while export demand declined for four straight months.
- Employment Trends:
- Job creation continued in December, though at a slower pace compared to November.
- Employment growth aligned with the average seen throughout 2025.
- Rising new orders created capacity pressures, leading to backlogs for two consecutive months.
- Business Sentiment:
- Optimism among manufacturers reached its highest level in three months, signaling confidence for 2026.
- Firms increased pre-production and post-production inventories to safeguard efficiency and meet demand.
- Cost Pressures:
- Input cost inflation remained strong, though slightly lower than in November.
- Companies passed higher costs to clients, with selling price increases stronger than the 2025 average.
Strategic Insights
1. Resilience Amid Global Headwinds
Indonesia’s ability to sustain manufacturing expansion despite weaker export demand highlights the strength of its domestic market. This resilience provides a buffer against global uncertainties, positioning the sector as a stabilizing force for the broader economy.
2. Supply Chain Constraints as a Growth Limiter
Raw material shortages continue to cap production growth, underscoring the need for stronger supply chain management and diversification. Addressing these bottlenecks will be critical to unlocking higher output and sustaining competitiveness in 2026.
3. Domestic Demand as a Growth Engine
The steady rise in domestic orders reflects robust consumer and industrial demand within Indonesia. This trend suggests that internal market dynamics can offset external weaknesses, reinforcing the importance of policies that stimulate local consumption and investment.
4. Employment and Capacity Pressures
While job creation remains positive, the slower pace of hiring relative to demand growth signals potential strain on capacity. Rising backlogs indicate that firms must balance workforce expansion with productivity improvements to avoid bottlenecks.
5. Cost Inflation and Pricing Strategies
Persistent input cost inflation poses challenges for profitability. The decision by firms to pass costs onto clients reflects confidence in demand but also raises risks of price sensitivity among consumers. Managing inflationary pressures will be key to sustaining competitiveness.
6. Outlook for 2026
Business optimism suggests stronger performance ahead, supported by inventory adjustments and expectations of improved demand. However, the sector’s trajectory will depend on resolving supply shortages, stabilizing costs, and enhancing export competitiveness. If these challenges are addressed, Indonesia’s manufacturing industry could play a pivotal role in driving economic growth in the coming years.