OECD Economic Outlook, Volume 2025 Issue 1

Indonesia

Real GDP is projected to grow by 4.7% in 2025 and 4.8% in 2026. Low inflation and easing financial conditions will spur private consumption and investment. However, uncertainty about domestic fiscal policy will temper these gains, while export growth is expected to slow amid global trade tensions. Inflation is projected to pick up to 2.3% in 2025 and 3% in 2026, as the recent depreciation of the currency gradually feeds into domestic prices. The current account deficit is expected to widen modestly, but a further decline in commodity prices could exacerbate this by driving down export revenues.

Monetary policy is expected to continue to ease over 2025 and 2026, as inflationary pressures remain contained amid soft growth. Fiscal policy is projected to be broadly neutral in 2025, as increased spending on a free meals programme and additional public investment through the new sovereign wealth fund (“Danantara”) will be financed by spending cuts elsewhere. Reducing regulatory barriers to foreign investment and raising the efficiency of public spending through improved targeting of social benefits to vulnerable households are key medium-term policy priorities. Reducing informality would help improve social protection and raise tax revenues.

The economy is going through a soft patch

Annual seasonally unadjusted real GDP growth slowed to 4.9% in the first quarter of 2025, amid soft investment, stable household consumption and a positive contribution from net exports. While the unemployment rate declined to 4.8% in the first quarter of 2025, among the lowest values in two decades, the economy appears to have slowed, as consumer and business sentiment deteriorated and prices of key export commodities declined. Low inflation is supporting real household incomes, but high borrowing costs continue to weigh on investment.

Inflation has come down from around 6% in the second half of 2022 to 2% in April 2025, on the back of monetary policy tightening, the normalisation of food and commodity prices and a temporary electricity price discount in January and February of 2025. The phase-out of the price discount and the depreciation of the currency – around 4% relative to the US dollar since the beginning of the year – will put upward pressure on prices in the near term, but core inflation remains close to the mid-point of the central bank’s target band of 1.5-3.5% and inflation expectations are stable. Exposure to higher US import tariffs is relatively limited, with goods exports to the United States amounting to less than 2% of GDP.

Indonesia 1

1. Year-on-year growth rates. The sum of components may deviate from observed GDP growth because of balancing items, chain-linking procedures and direct/indirect seasonal adjustment methods.

2. Annual rates. The shaded area corresponds to the central bank’s inflation tolerance band.

Source: OECD Economic Outlook 117 database.

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Indonesia: Demand, output and prices

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Indonesia 2

Source: OECD Economic Outlook 117 database; and CEIC.

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Macroeconomic policies are becoming less restrictive

Monetary policy is expected to ease over 2025-26. The central bank initiated the ongoing easing cycle in August 2024, bringing the policy rate from 6.25% to 5.5% in May, but financial conditions remain restrictive. With stable inflation expectations and domestic demand growth projected to be below trend, there is room for the central bank to further reduce the policy rate towards a more neutral level of around 5%. Pursuing a data-dependent approach that balances support to economic growth and close monitoring of price pressures from the recent currency depreciation is key to durably maintain inflation within the central bank’s target band.

The government budget deficit is expected to increase from 2.3% of GDP in 2024 to 2.8% in 2025. The expansion of a free meals programme for schoolchildren and pregnant women and the creation of a new sovereign wealth fund, as well as foregone revenue from a temporary electricity price discount in early 2025 will put upward pressure of around 1.6% of GDP on the budget deficit. This will be mitigated by across-the-board spending cuts amounting to around 1.3% of GDP, which will maintain the budget deficit below the statutory limit of 3% of GDP. Despite the rising budget deficit, the fiscal policy stance will be neutral in 2025, as only part of the funds transferred to the new sovereign wealth fund will translate into new public investment outlays in 2025. Accelerating disbursements from the new sovereign wealth fund in the near term while ensuring transparency and accountability in its management would support growth in 2025, which appears appropriate amid rising uncertainty about the growth outlook. Gradually raising government revenue from 2026 would put public debt – which is currently around 40% of GDP – on a declining path.

Growth is expected to slow in the near term

Real GDP growth is expected to slow to 4.7% in 2025 before picking up slightly to 4.8% in 2026. The recent weakening of business and consumer sentiment amid fiscal policy uncertainty and high borrowing costs will weigh on private consumption and investment in the first half of 2025. As financial conditions gradually ease, inflation remains comfortably within the central bank’s target band, and public investment outlays from the new sovereign wealth fund gather momentum, domestic demand is expected to gradually increase over the second half of 2025 and 2026. The recent escalation of global trade tensions and the decline in commodity prices are expected to weigh on external demand and export revenues. Inflation is expected to gradually rise to the mid-point of the central bank’s target range, as the effects of the temporary electricity price discount at the beginning of 2025 fade, and the recent depreciation of the currency gradually feeds into domestic prices.

Risks are tilted to the downside. Persistent capital outflows driven by global and domestic policy uncertainty could place renewed pressure on the currency, potentially leading to a temporary widening of the current account deficit and fuelling inflation through higher import costs. Additionally, a larger‑than‑expected slowdown in China – Indonesia’s largest export market – would further weigh on export performance, particularly in commodity sectors. On the upside, swift and effective deployment of the newly established sovereign wealth fund could catalyse private investment by crowding in capital and accelerate the implementation of high-impact infrastructure and industrial projects.

Structural reforms are needed to boost growth

Recent reforms have reduced barriers to foreign investment, but significant barriers to foreign equity ownership remain, especially in the telecommunications and transportation sectors. Moreover, the investment climate is affected by overlapping regulations, uneven policy implementation, and limited coordination among government agencies. Further reforms in this area will become increasingly relevant in the context of global trade policy uncertainty and the potential reconfiguration of supply chains. Addressing infant malnutrition through the free meals programme will strengthen public health, but improved targeting to vulnerable households would ensure that funds are spent more efficiently. Reforms to reduce informality would help broaden the tax base and create fiscal space for the expansion of public investment, including transport infrastructure and clean energy, as well as health and education spending. Shifting the funding of maternity leave from employers to social insurance, in particular for smaller firms and self-employed women, would help raise female labour force participation.