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Jakarta Post

October manufacturing activity points to slow economic recovery in Q4

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Wed, November 4, 2020   /   01:57 pm
October manufacturing activity points to slow economic recovery in Q4 Lower productivity: Workers assemble Isuzu Traga trucks at the Isuzu factory in East Karawang in West Java. The productivity of Indonesian workers lags behind that of neighboring countries because of a lack of proper education. (JP/Seto Wardhana)

Manufacturing activity declined further in October as manufacturers cut back on production and reduced workforce amid weak demand, showing further signs of sluggish economic recovery in the fourth quarter.

The manufacturing gauge Purchasing Managers' Index (PMI) survey data published by IHS Markit on Monday showed that the PMI had risen from 47.2 in September to 47.8 in October, which was still below August’s 50.8. Index readings below 50 percent indicate a contraction, while those above 50 percent signify an expansion.

The latest reading marked a “further deterioration” in the health of the sector, with production and sales both decreasing further, according to IHS Markit principal economist Bernard Aw.

"Indonesian goods producers continued to struggle against weak demand, rising overhead and COVID-19 restrictions,” Aw said in a statement on Monday.

The manufacturers cut back on capacity and investment to remain viable, with headcounts, input purchases and inventories all further reduced in October, he went on to say.

The survey also notes that the coronavirus pandemic took a greater toll on the country’s workforce in October as manufacturers cut staff numbers further to control costs amid weakening sales and reduced production requirements.

“Employment shrank for the eighth month running, with the pace of job shedding accelerating as redundancies were widely reported among firms,” the survey reads.

Earlier this year, the government estimated that up to 5.2 million Indonesians might lose their jobs during the health crisis and more than 3 million might fall into poverty amid slowing business activity. 

The economy shrank 5.32 percent in the second quarter and is expected to contract by around 3 percent in the third quarter this year, according to President Joko “Jokowi” Widodo on Monday, which would mark the country’s first recession since the 1998 financial crisis.

Meanwhile, the government lifted large-scale social restrictions (PSBB) implemented in some provinces in the second quarter but the rise in virus cases prompted the Jakarta administration to reinstate the restrictions between Sept. 14 and Oct. 11. 

Read also: Jakarta returns to transitional PSBB rules

According to the survey, the reopening of the economy provided only a “limited boost” to the manufacturing industry as both production volumes and new orders declined further in October, but at a slower pace compared to the previous month.

However, manufacturers’ expectation on output over the coming year improved to the strongest for one and a half years because of hopes that market conditions will return to normal, according to the survey.

"The impact of the loosening of PSBB in mid-October may only be seen in November but even then, the uncertainty of the pandemic trajectory and absence of an effective vaccine could keep demand and economic activity subdued in the coming months," Aw added.

The manufacturing industry contributed around 19 percent to GDP, the highest among all business sectors, and contracted 6.19 percent in the second quarter as a result of cooling domestic and global economic activity.

The latest PMI data was “disappointing” and pointed to further economic contraction in the fourth quarter, according to Mirae Asset Sekuritas Indonesia economist Anthony Kevin, adding that the economy will take longer to recover as a vaccine remained unavailable and virus containment efforts remained sluggish.

“The latest data showed that the recession is highly likely to continue into the last quarter of the year,” he told The Jakarta Post. “Although the economy was reopened after the second PSBB, the prospect of economic and manufacturing recovery remained fragile without a vaccine and strong pandemic handling.”

Industry Minister Agus Gumiwang Kartasasmita stated that the improvement in PMI at the beginning of the fourth quarter was a positive signal for the economy.

“Although it was a slight increase, it still showed great confidence from industry players,” Agus said in a statement on Tuesday.

However, he acknowledged the impact of the PSBB on the manufacturing sector in various regions.

Indonesian Employers Association (Apindo) chairman Hariyadi Sukamdani said the key to economic recovery was COVID-19 handling.

“It is not easy, but if PSBB is reimposed due to the rising number of cases, it would be even more worrying,” he said in a statement.