Indonesia Economic Prospects : Managing Risks, Unlocking Productivity

Overview & Synopsis

Indonesia entered 2026 with strong growth momentum, driven primarily by resilient domestic demand, with GDP expanding by 5.6 percent year-on-year in Q1 2026 - its highest since mid-2021 supported by robust household consumption, early Ramadan spending, public-sector bonuses, and the expansion of social programs such as free nutritious meals, while government consumption and investment also strengthened, with gross fixed capital formation rising to 6.0 percent and high-frequency indicators confirming broad-based economic activity; however, this resilience was tested by two external shocks, first through financial market pressures following MSCI’s concerns over Indonesian securities, which triggered equity sell-offs, reduced capital inflows, and tighter financing conditions, and second through the escalation of the Middle East conflict, which pushed oil prices above US$100 per barrel, increasing inflationary pressures, fiscal subsidy burdens, and supply chain disruptions while weakening global demand; despite these developments, Q1 growth remained largely unaffected due to lagged transmission effects and continued fiscal support, with services remaining the main growth driver, complemented by manufacturing expansion, while inflation rose but stayed within Bank Indonesia’s target range due to government interventions, and labor markets improved modestly, though structural challenges persist, including weak job quality, rising underemployment, and declining real wages, posing risks to sustained and inclusive growth.