Positive Outlook for Indonesian Economy: Expansive Manufacturing PMI and Declining Inflation Rate

Hadijah Alaydrus, CNBC Indonesia

Tuesday, 01/08/2023 15:27 WIB

Photo: Ministry of Finance Building (CNBC Indonesia/Andrean Kristianto)

Jakarta, CNBC Indonesia – The Indonesian economy is being colored by two good news today, Monday (1/8/2023), namely the expansive manufacturing Purchasing Manufacturers’ Index (PMI) and the declining inflation rate.

The Indonesian Manufacturing Sector has consistently continued to expand for 23 consecutive months in July 2023, as reflected in the manufacturing PMI which was recorded at 53.3, an increase from the previous 52.5 in June 2023.

Head of the Fiscal Policy Agency (BKF) of the Ministry of Finance Febrio Kacaribu said the strengthening of the manufacturing PMI was driven by an increase in new demand both domestically and exports.

Meanwhile, developments in the manufacturing performance of several major trading partner countries such as China and Japan contracted to 49.2 and 49.6 respectively. Other ASEAN countries such as Malaysia and Vietnam still contracted at 47.8 and 48.7 levels.

The increase in the manufacturing PMI in July demonstrated the optimism of business actors in line with improving economic conditions.

“Overall, business sentiment in the Indonesian manufacturing sector remained positive in July. The recovery in export demand to an expansive level has increased overall aggregate demand, which is expected to support economic growth performance in Semester II,” said Febrio.

Meanwhile, inflation in July 2023 continued its downward trend. Inflation was recorded at 3.08% (yoy), a significant decrease from June 2023 (3.52% yoy). This decrease was influenced by a slowdown in price increases for all components.

Core inflation also continued its downward trend to 2.43% yoy. Febrio assessed that this was caused by the slowdown in price increases for almost all categories of goods and services.

Furthermore, price inflation is regulated by the government (administered prices) continues to be in a downward trend reaching 8.42% (yoy), down from June (9.21%, yoy). This reflects the good management of domestic energy prices in the midst of fluctuating world crude oil prices.

On the food side, volatile food inflation experienced a deflation of 0.03% (yoy), down from inflation in June 2023 (1.20%, yoy). This deflation was affected by controlled prices for various chilies and shallots due to abundant stocks.

In addition, Febrio stressed that controlled food prices were supported by an increasingly effective collaborative policy to control national food inflation. Nonetheless, the potential impact of El Nino needs to be watched out for as rainfall begins to decrease which can affect agricultural productivity.

“The government continues to be committed to controlling inflation nationally. Various policies through the Central Inflation Control Team (TPIP) and Regional Inflation Control Teams (TPID) are carried out consistently to maintain food price stability,” he said.

In addition to food price interventions such as market operations and holding cheap food, he emphasized that efforts to maintain an adequate supply of rice and facilitate food distribution are continuing to anticipate price fluctuations.

“Meanwhile, in dealing with the impact of El Nino, policies implemented include optimizing the use of water infrastructure and strengthening food storage,” said Febrio.

The government is also providing a fiscal incentive of IDR 1 trillion in 2023 in order to support inflation control at the regional level. As of 31 July 2023, the Government has distributed IDR 330 billion for period I.

The allocation of these fiscal incentives is evidence of the Government’s consistency in controlling national inflation, especially in optimizing the role of the State Budget as a shock absorber.

“With these funds and the support of policy innovations in each region, price stability is expected to be maintained and the inflation target of 3% ± 1% at the end of the year can be achieved,” he concluded.

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