Indonesia’s manufacturing sector showed signs of stabilization in May 2026 after slipping into contraction a month earlier. The latest data from S&P Global revealed that the country’s Manufacturing Purchasing Managers’ Index (PMI) climbed back to 50.0 in May from 49.1 in April, bringing the sector back to the threshold that separates contraction from expansion.
The improvement suggests that Indonesia’s manufacturing activity has stopped declining for now. Yet beneath the headline figure, businesses continue to face serious challenges. Rising raw material costs, supply shortages, and weak export demand are still weighing heavily on production and profitability.
According to S&P Global Market Intelligence Economist Usamah Bhatti, manufacturers spent much of May dealing with disruptions that limited their ability to increase output despite stronger demand from customers.
“The Indonesia’s manufacturing economy remained under pressure during May as production was constrained by rising raw material prices and limited input availability,” Bhatti said in a statement on Tuesday, June 2, 2026.
One of the main factors supporting the PMI recovery was stronger domestic demand. New orders increased for the second consecutive month, with growth accelerating to its fastest pace since February. Companies reported that many customers were placing larger orders and building inventories in anticipation of future price increases and continued uncertainty surrounding raw material supplies.
The increase in sales, however, did not necessarily reflect stronger end-user consumption. In many cases, customers were purchasing additional stock as a precautionary measure.
“Although companies recorded stronger sales growth, this often reflected efforts by clients to build inventories amid pricing and supply disruptions,” Bhatti explained.
While order books improved, factories struggled to translate that demand into higher production levels. Manufacturing output continued to decline for the third straight month. Producers cited soaring raw material prices and shortages of essential inputs as the main reasons for the ongoing contraction in production volumes.
Conditions in overseas markets presented another challenge. Export demand continued to deteriorate, extending a downward trend that has now lasted three months. International sales fell at the fastest pace since August 2021, highlighting persistent weakness outside the domestic market.
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“The improvement in order conditions was limited to the domestic market, while exports fell sharply to their weakest level in almost five years,” Bhatti said.
Manufacturers linked the export slowdown to several external pressures. S&P Global noted that some companies pointed to the ongoing conflict in the Middle East and rising prices, both of which have weakened demand from foreign buyers.
At the same time, cost pressures intensified dramatically. Input price inflation surged during May and reached its highest level since S&P Global began collecting PMI data in September 2013.
The overwhelming majority of manufacturers attributed the increase to more expensive raw materials. As production costs climbed, many businesses responded by passing part of the burden on to customers through higher selling prices.
The result was the sharpest increase in factory gate prices since October 2013.
“Cost inflation accelerated sharply midway through the second quarter and reached its strongest level since survey records began in September 2013. This prompted companies to raise selling prices at the fastest pace seen in twelve and a half years,” Bhatti explained.
The combination of higher prices and limited material availability also affected purchasing decisions. Rather than increasing procurement activity, many manufacturers reduced purchases and relied on existing inventories to keep production running and fulfill customer orders.
Supply chain problems remained another source of strain. Delivery times from suppliers lengthened again in May, marking eight consecutive months of worsening delays. According to the survey, distribution bottlenecks and shortages of raw materials linked to geopolitical conflicts continued to disrupt supply flows.
The pressure on operations began to show in company workloads as well. Outstanding business increased for the first time since February, indicating that some firms were unable to complete orders as quickly as before.
Despite the rise in unfinished work, manufacturers continued to trim staffing levels. Employment declined marginally for a third straight month as production activity remained below desired levels and companies adjusted to ongoing uncertainty.
Even so, the sector has not lost faith in its longer-term prospects. Manufacturers remain optimistic that conditions will improve over the coming year. Many businesses expect production to recover if raw material prices stabilize and supply chains gradually return to normal.
Still, confidence remains subdued compared with historical standards.
“The level of confidence regarding the outlook for the next 12 months remained unchanged and continues to stay below the historical average,” Bhatti noted.
The latest PMI figures paint a mixed picture of Indonesia’s manufacturing industry. Domestic demand is strengthening and helping pull the sector back toward expansion. However, soaring costs, supply disruptions, weak exports, and labor market pressures continue to limit the pace of recovery. For now, manufacturers appear to be balancing cautious optimism with the realities of a challenging business environment.
