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View all search resultsWhen economic growth and manufacturing go their separate ways
As Indonesia’s factory activity plummets while the broader economy expands, a troubling question emerges: is the nation outgrowing the very manufacturing engine it needs to achieve its high-income ambitions?
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An employee of a small shoe manufacturer creates their new products while recording video to be posted on social media on September 27, 2023, in Bogor, West Java. (AFP/Aditya Aji)
I
ndonesia’s latest Purchasing Managers’ Index (PMI) is out, and the results are alarming. However, the core issue extends far beyond a single disappointing data release.
In June, Indonesia’s Manufacturing PMI fell sharply to 46.9, down from 50.0 in May, signaling a renewed contraction in factory activity. New orders weakened, export demand recorded its steepest decline since August 2021, firms scaled back production and employment softened. Taken in isolation, this could be dismissed as just another disappointing monthly indicator. PMIs naturally fluctuate, and a single monthly survey rarely defines the trajectory of an entire economy.
What makes this episode remarkable is not the index itself, but what it reveals about a much larger structural dilemma: Indonesia’s economic growth and its manufacturing sector are decoupling.
Consider the contrast. Indonesia’s economy expanded by 5.61 percent in the first quarter of 2026. Government expenditure surged by more than 21 percent, household consumption remained resilient, credit continued to expand and investment financing stayed strong. By most conventional macroeconomic measures, the economy appears robust.
Yet, manufacturers tell a fundamentally different story. Factory orders are shrinking, export demand is weakening, production is slowing and firms are growing increasingly cautious about hiring.
Historically, these indicators moved in tandem. When the broader economy accelerated, factories expanded; when demand strengthened, manufacturers hired, invested and exported more.
Today, that foundational relationship appears to be fracturing. This divergence raises a question far more critical than whether the PMI will bounce back above the 50-point threshold next month: Is Indonesia entering a new phase where economic growth is becoming progressively detached from manufacturing?
