As of July 2025, Indonesia’s manufacturing sector finds itself in a delicate position. While it continues to operate within contraction territory, there’s a noticeable slowdown in the pace of decline—a detail worthy of analysis. Given the backdrop of rising cost pressures, softening demand, and diminishing business confidence, the government’s introduction of supply-side stimulus measures raises a significant question: Are we witnessing the first inklings of a recovery, or is this merely a temporary relief?
Key Facts & Background
In July 2025, Indonesia’s Manufacturing Purchasing Managers’ Index (PMI) registered at 49.2, a welcome improvement from the previous month’s 46.9. Although this represents progress, it remains critical to note that the figure still resides below the neutral threshold of 50—a clear indicator that contraction persists. The sector has been under stress for the past four months, with production and new orders reflecting ongoing weakness, albeit with a reduction in the severity of decline compared to June.
The data also indicates a troubling trend in export orders, which have continued to decrease, leading firms to engage in layoffs and reduce purchasing activities. Furthermore, inflation of input costs has reached its peak in four months, driven by the rising prices of raw materials and fluctuations in currency exchange rates. The implications of these financial pressures are profound, particularly as business optimism has plummeted to unprecedented lows, influenced by anxiety over US tariffs and domestic purchasing power.
The government’s response has been proactive, with the announcement of supply-side stimulus initiatives aimed at financing labor-intensive industries, optimizing special economic zones, and implementing deregulation to enhance the overall business environment. Regionally, countries like Japan and South Korea are also experiencing manufacturing contractions, as evidenced by their PMIs dropping below the critical 50 mark. Moreover, the US has recently lowered reciprocal tariffs on Indonesian exports to 19%, potentially opening up new avenues for labor-intensive products, including textiles, footwear, and furniture.
Significantly, Indonesia’s trade balance showed a surplus of USD 4.10 billion in June 2025, buoyed by an impressive year-on-year export growth of 11.29%—particularly in manufacturing and agriculture. This growth stands against a backdrop of bolstered imports, which increased by 4.28%, largely attributed to capital goods necessary for the recovery of domestic manufacturing.
Strategic Implications
The current trend of a slower contraction paves the way for a cautious, but possible recovery. However, it is crucial to exercise prudence before signaling a definitive turnaround. The success of supply-side measures and deregulation in enhancing medium-term competitiveness hinges largely on their effective implementation and the responsiveness of the industries involved.
Moreover, external factors—such as fluctuations in global tariffs and ongoing challenges facing the manufacturing sector—necessitate that Indonesia adopt flexible trade and industrial strategies moving forward. The current atmosphere of diminished business optimism poses a risk to both investment appetites and the momentum of labor-intensive sectors, which could hinder future growth.
On a favorable note, the strength of exports and a healthy trade surplus offer a buffer to ensure domestic stability. Nevertheless, further diversification remains essential to mitigate reliance on specific sectors. Finally, it is imperative for Indonesia to take note of the regional manufacturing downturn. This situation underscores the urgency of fortifying its industrial resilience, which can be achieved through strategic positioning in the global market.
In conclusion, while the path ahead is filled with challenges, the potential for recovery exists. Indonesia must capitalize on this moment to implement robust strategies aimed at resilience and growth, reassuring stakeholders that the nation is well-equipped to navigate the complexities of the contemporary economic landscape.