Indonesian manufacturers see tough times ahead as higher US tariffs kick in

Asia News Network

3 days ago

August 4, 2025
JAKARTA – Indonesian manufacturers are increasingly cautious in their outlook as business confidence has fallen to a record low amid concerns over United States import tariffs. Experts warn that waning sentiment risks holding back investment.
The latest manufacturing Purchasing Managers' Index (PMI) report from S&P Global shows that producers' expectations for business conditions in the coming year slumped sharply in July as confidence hit the lowest level since the series began in April 2012.
Business confidence is an essential indicator to predict future behavior in the crucial sector, including decisions on investment, production expansion and employment policies, according to Permata Bank chief economist Josua Pardede.
'In the short to medium term, weak business confidence could result in slower new investments in the manufacturing sector, which could adversely impact production and job creation,' he told The Jakarta Post on Friday.
While current manufacturing activity improved as the headline PMI index rose to 49.2 in July from a reading of 46.9 in June, firms raised concerns that the US tariffs and reduced purchasing power on the part of clients would limit production volumes in the year ahead.
Also, with a value below the 50-point threshold that separates expansion from contraction, the index remained in negative territory for a fourth consecutive month amid sustained weak output and demand.
'July's survey data indicated another negative month for the health of the Indonesian manufacturing economy. Downturns in output and new orders were sustained at the start of the third quarter, but eased from June.' Usamah Bhatti, economist at S&P Global Market Intelligence, explained on Friday.
'At the same time however, there was a renewed fall in new export orders, while firms remained in retrenchment mode as indicated by falling employment and purchasing levels,' he added.
Companies bought fewer materials in July, citing lower production requirements as they tried to use up existing stock. This extended the decline in purchasing activity for four consecutive months.
The survey shows that firms also faced additional strain on supplies, with longer delivery times due to shipping delays and disruption caused by the Iran-Israel conflict that lasted 12 days from mid-June.
Josua pointed out that, with employment and purchasing activity remaining in contraction territory, the manufacturing sector was likely to stay cautious about scaling up production capacity and hiring.
The situation was exacerbated by the reported increasing price pressure weighing on profitability, as cost inflation hit a four-month high amid rising raw material prices. Exchange rate fluctuation also contributed to higher prices for imported goods.
Josua argued that a recovery in the country's manufacturing sector in the short term would depend on the government stabilizing macroeconomic conditions by managing inflation, boosting spending power and mitigating risks from international trade.
'Without strategic measures and appropriate policy interventions, the weak business sentiment risks prolonging the manufacturing sector's contraction, hampering broader economic recovery,' Josua said.
A research note from PT Samuel Sekuritas Indonesia published on Friday also highlights that reviving optimism among manufacturers would hinge on effectively managed external trade pressures and stabilized global commodity prices, as well as domestic fiscal and monetary policy support.
'Effective navigation of geopolitical tensions and global economic uncertainties will remain crucial for restoring stronger manufacturing growth in quarters ahead,' reads the note, adding that record-low manufacturer sentiment amid US tariffs could further dampen external competitiveness, potentially exacerbating Indonesia's already vulnerable trade position.
The latest S&P Global survey was conducted between July 10 and 24, so most responses would have been submitted before the announcement of the trade agreement with the US.
In the bilateral trade talks with the US, Indonesia has agreed to a range of regulatory changes to address what the US deems nontariff barriers.
According to a joint statement on the trade framework published on July 22 on the White House website, Jakarta will eliminate tariffs on 99 percent of US goods, including agricultural products, seafood, pharmaceuticals, automotive items and information and communication technology (ICT) equipment.
In return, Washington will reduce its 'reciprocal tariff' on Indonesian goods from the 32 percent threatened earlier to 19 percent, with a possibility of further cuts for select commodities 'not naturally available or domestically produced in the US'.
Meanwhile, the Industry Ministry reported on Thursday that Indonesia's business confidence index (IKI) had increased to 52.89, up 1.05 points from 51.84 in June.
It attributed the increase to upticks in new orders, inventories and production, though the latter remained in contraction territory, while growth in orders was due to increased demand from both foreign and domestic markets.
'However, a contraction in output shows that business players are still cautious about increasing production amid global uncertainties,' ministerial spokesperson Febri Hendri Antoni Arif said in a statement.
The rise in the IKI indicated the country's manufacturing index remained in an expansion phase, he noted, which reflected the sector's resilience amid global uncertainties and the weakening economies of key trade partners like the US, Japan and China, as well as European countries.
Bank Danamon economist Hosianna Evalita Situmorang also described the improvement as a sign of gradual recovery in the manufacturing sector amid uncertainties in trade policies and falling exports, signaling growing domestic demand that supported the real sector.
However, she said the waning optimism among manufacturers reflected persistent challenges, particularly slow government spending in the first half of this year, which in turn hindered the impact of interest rate cuts from reaching the real sector.
'Looking ahead, hopefully [business confidence] will improve, given the accelerating government spending and improved liquidity,' she told the Post on Friday.