Indonesia’s Manufacturing Hits Near-Year High, But Challenges Loom

Indonesia’s manufacturing sector recorded its strongest performance in nearly a year in February 2025, buoyed by a surge in domestic demand and new orders ahead of Ramadan. However, beneath the optimistic figures lie persistent challenges—faltering exports, rising costs, and uneven growth across industries—that cast doubt on the sustainability of this momentum. As the government celebrates the uptick, analysts warn that deeper structural issues could undermine long-term economic stability.

According to the latest S&P Global Indonesia Manufacturing Purchasing Managers’ Index (PMI), released on 4 March 2025, the index soared to 53.6 in February from 51.9 in January, marking the third consecutive month above the 50-point threshold that separates expansion from contraction. This is the highest level since March 2024, reflecting robust growth in new orders, production, and employment. The survey, which canvassed around 400 manufacturers nationwide, highlighted the fastest job growth in the survey’s 14-year history as companies scaled up capacity to meet rising demand.

Joe Hayes, principal economist at S&P Global Market Intelligence, attributed the surge to heightened domestic consumer demand, particularly in the lead-up to Ramadan, which began in March this year. “Manufacturers’ confidence jumped to its highest level in nearly three years, suggesting optimism about future demand,” Hayes noted. However, he cautioned that export orders saw a slight decline, a trend that could signal vulnerabilities amid global trade uncertainties and rising protectionism.

Domestic Strength Amid Global Headwinds

The domestic market has emerged as the primary driver of Indonesia’s manufacturing growth, with consumer spending typically peaking during Ramadan and the subsequent Idul Fitri celebrations. Industry Minister Agus Gumiwang Kartasasmita hailed the February PMI as the strongest in Southeast Asia, outpacing even advanced economies like China, Japan, and the United States. In a statement on 4 March, he credited government policies, such as the five-year extension of the cheap gas programme for specific industries, for creating a favourable business climate.

Agus also underscored the importance of protecting the domestic market from imported goods through safeguards and restrictions to prevent dumping. “With the domestic market as the main driver, we must ensure fair competition to sustain this momentum,” he said. He expressed confidence that the PMI would remain above 50 in March, driven by heightened consumption of food, beverages, textiles, clothing, and footwear during the festive period.

Yet, while domestic demand offers a buffer, the decline in export orders raises concerns for industries reliant on international markets, such as textiles and footwear, which traditionally depend on sales to regions like the United States. Analysts point to global economic uncertainties, including protectionist policies in key markets, as a potential drag on Indonesia’s export-driven sectors. This imbalance between domestic strength and external weakness highlights the fragility of the current manufacturing boom.

Cost Pressures and Inflationary Risks

Despite the positive PMI figures, manufacturers continue to grapple with mounting cost pressures. The S&P Global report noted unfavourable exchange rate movements, rising raw material prices, and vendor markups as key challenges, forcing many producers to raise prices in February. This trend, while helping to offset input costs, risks dampening consumer demand if inflation accelerates.

Josua Pardede, chief economist at Bank Permata, acknowledged the complexity of Indonesia’s economic landscape. “The rise in demand for manufactured goods suggests improving business confidence and consumer spending in certain sectors,” he said in a statement on 4 March. However, he warned that deflation in food and energy prices, coupled with temporary government interventions like electricity subsidies, could mask deeper concerns about broader consumer demand. The 50 percent discount on electricity bills for the first two months of 2025, for instance, provided short-term relief but may not address underlying structural issues.

Uneven Growth Across Sectors

While the headline PMI figure paints a rosy picture, not all manufacturing sectors are sharing in the gains. Mohammad Faisal, executive director at the Center for Reform on Economics (CORE), pointed out that seasonal demand ahead of Ramadan played a significant role in boosting activity, alongside government incentives. However, he cautioned that some industries are in decline, with the textile sector particularly hard-hit. “Some industries may see contraction, and some have even collapsed. The recent bankruptcies and layoffs at Sritex are a case in point,” Faisal told The Jakarta Post on 4 March.

Andry Satrio Nugroho, head of the Center of Industry, Trade and Investment at the Institute for Development of Economics and Finance (INDEF), echoed these concerns, noting that domestic orders typically rise before Ramadan but do not reflect the full reality on the ground. “Companies are continuing to shut down operations or lay off workers, particularly in labour-intensive industries like textiles,” he told The Jakarta Post. He urged the government to look beyond the PMI and address the structural challenges facing these sectors, including declining exports and global competition.

The textile industry, once a cornerstone of Indonesia’s manufacturing base, has been battered by a combination of falling international demand and rising domestic costs. High-profile cases like Sritex, a major textile firm that has faced financial distress and layoffs, serve as a stark reminder that the manufacturing surge is far from uniform. These disparities suggest that while certain consumer-driven sectors thrive, others risk being left behind, potentially exacerbating economic inequality and unemployment.

Government Response and Policy Implications

The Indonesian government has been quick to tout the PMI figures as evidence of effective policymaking, with measures like electricity subsidies and the cheap gas programme cited as key contributors. However, analysts argue that such short-term interventions may not be enough to address the deeper challenges facing the sector. Faisal of CORE called for more targeted support for struggling industries, warning that over-reliance on seasonal demand and domestic consumption could leave the economy vulnerable to external shocks.

Nugroho of INDEF similarly cautioned against complacency, urging the government to tackle the root causes of export declines and industrial closures. “This trend raises serious questions for policymakers. A strong PMI alone does not mean the industry is doing well. The reality is far more complicated,” he said. He advocated for comprehensive reforms to enhance competitiveness, including investments in technology and infrastructure to reduce production costs and boost export potential.

There is also a broader debate about the role of protectionist measures in sustaining manufacturing growth. While Minister Agus has emphasised the need to shield the domestic market from imported goods, some economists warn that excessive restrictions could stifle innovation and limit access to affordable inputs for manufacturers. Striking a balance between protection and openness will be critical for Indonesia to navigate the complexities of global trade while fostering a resilient domestic industry.

Looking Ahead: A Cautious Outlook

As Indonesia basks in the glow of its manufacturing uptick, the road ahead remains uncertain. The surge in domestic demand, particularly during Ramadan, offers a temporary boost, but persistent challenges—declining exports, cost pressures, and uneven sectoral growth—suggest that sustained expansion is far from guaranteed. If export markets continue to weaken, the reliance on domestic consumption could prove unsustainable, especially if inflationary pressures erode purchasing power.

Moreover, the government faces the delicate task of supporting struggling industries without resorting to short-term fixes that mask deeper issues. Investments in workforce training, technological upgrades, and export diversification could help address some of these challenges, but such measures require long-term commitment and coordination across multiple sectors.

For now, the February PMI figures provide a snapshot of resilience in Indonesia’s manufacturing sector, driven by domestic strength and festive demand. Yet, as analysts like Pardede, Faisal, and Nugroho have warned, the broader economic landscape remains fraught with risks. The government’s ability to translate this momentary success into lasting growth will depend on its willingness to confront structural weaknesses head-on, ensuring that all sectors—not just a select few—can thrive in an increasingly competitive global economy.

In the coming months, all eyes will be on whether Indonesia can maintain its manufacturing momentum beyond the Ramadan surge. If it fails to address the underlying issues of export decline and industrial disparity, the current optimism may prove short-lived, leaving the economy vulnerable to future downturns. For a nation striving to solidify its position as a regional economic powerhouse, the stakes could not be higher.