While China’s manufacturing indices have been rather depressing of late, Indonesia’s numbers are much healthier.

The PMI score came out at 51.7 in April – up from March, a six-month high, and the second highest in the last few years. So, all good?

The improvement from March was moderate – just 0.4 points, as the chart below shows. But within the index, new orders expanded for the eleventh consecutive month – evidence of Indonesia’s strengthening domestic demand.

And that’s the main difference with China. As Leif Eskesen, chief Asean economist at HSBC pointed out, the Indonesian resilience in the face of tricky global conditions is “thanks to the resilient domestic economy, which is supported by strong structural drivers of growth and very accommodative monetary policy settings.”

However, there are a few mild worries on the horizon.

The first is inflation, which came in on Wednesday at 5.6 per cent year-on-year – slightly lower than March’s 5.9 per cent, but still above target. A decline in food prices helped, according to data from the statistics bureau.

Although inflation seems to be headling the right way, it could go higher if fuel price subsidies are gradually lowered to contain the fiscal and trade deficits – although as Ben Bland reported for beyondbrics on Tuesday, the issue was dodged by the goverment again.

The other worry is domestic credit – which is partly fueling the demand that has kept manufacturers happy, and has sparked fears of a property bubble. As Capital Economics pointed out in a recent note, fears that Indonesia is about to experience a credit bubble are overdone, especially when credit levels are compared to other Asian countries such as China and Vietnam.

However, credit growth is growing by over 20 per cent year-on-year, which is fast, and also nearly double the rate of nominal GDP growth. Policy makers will need to keep watch that it doesn’t get out of hand. A hike in rates later in 2013 might be just the ticket to cool inflation – and credit.

Related reading:
Indonesia wrestles with fuel subsidies
, FT
Asean bubble fears emerge
, FT
Indonesian consumers keep economy humming
, FT

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