OECD Economic Outlook, Volume 2025 Issue 2

Indonesia

Real GDP is projected to grow by 5.0% in both 2025 and 2026, before picking up to 5.1% in 2027. Low inflation and easing financial conditions will spur private consumption and investment. However, slowing export growth amid rising global trade frictions is expected to weigh on activity. Inflation is projected to decline to 1.9% in 2025 on the back of limited demand pressures and low energy prices but will pick up to 3.1% in 2026 and 3.2% in 2027, as energy prices normalise and the depreciation of the currency since the beginning of the year gradually feeds into domestic prices. The current account deficit is expected to widen only modestly, but a further decline in commodity prices could exacerbate this by driving down export revenues.

With inflation comfortably within the central bank’s target band of 1.5-3.5% and growth around trend, monetary policy is expected to ease further. Fiscal policy is projected to have been moderately expansionary in 2025 as increased spending on a free meals programme and the creation a new sovereign wealth fund will only partially be financed by spending cuts elsewhere, before turning broadly neutral over 2026‑27. Raising the efficiency of public spending is a key policy priority, including through improved targeting of social benefits to vulnerable households. Strengthening the governance of public investment through improved planning, monitoring and evaluation would help ensure that infrastructure spending delivers stronger growth outcomes.

The economy has regained momentum

Real GDP grew by 5.0% in the third quarter of 2025, year-over-year and without seasonal adjustment, amid robust household consumption and a positive contribution from net exports. While gross fixed capital formation remained broadly stable, inventory drawdowns contributed negatively to growth. Business sentiment has stabilised, and prices of key export commodities have increased, but elevated borrowing costs and the pick-up in unemployment are weighing on consumer sentiment despite low inflation. Inflation has picked up to 2.9% in October from an average of 0.6% in the first quarter, on the back of the phase-out of a temporary electricity price discount. But overall price pressures remain contained with core inflation of 2.4% in October remaining around the mid-point of the central bank’s target band.

Under the preliminary bilateral trade deal with the United States announced in July 2025, a 19% tariff will apply to Indonesian exports, replacing a previously planned 32% rate. The direct effect on growth is expected to be mild, as goods exports to the United States represent less than 2% of GDP. Indirect channels are more significant, as the economy is closely tied to global commodity cycles, with commodity exports amounting to around one-third of total goods exports. Imports from China account for about 30% of imports, helping contain inflation pressures amid heightened global trade frictions.

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 118 database.

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Indonesia: Demand, output and prices

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Indonesia 2

Source: OECD Economic Outlook 118 database; and CEIC.

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Macroeconomic policies are becoming supportive

Monetary policy is expected to ease further. The ongoing easing cycle has brought the policy rate from 6.25% in August 2024 to 4.75%, but only part of this has been transmitted to bank lending rates and corporate bond spreads, which are only marginally lower than before the easing cycle. Lending growth remains well below the pre-easing and pre-pandemic averages. With stable inflation expectations and domestic demand growth projected to be around trend, there is room for the central bank to reduce the policy rate further by around 50 basis points towards a more accommodative level. Pursuing a data-dependent approach that balances support to economic growth and close monitoring of price pressures from the currency depreciation of around 3% against the US dollar since the beginning of the year – driven partly by narrower rate differentials – is key to durably maintain inflation within target.

The government budget deficit is expected to increase from 2.3% of GDP in 2024 to 2.9% over 2025-27. The expansion of a free meals programme for schoolchildren and pregnant women, the creation of a new sovereign wealth fund and various fiscal stimulus programmes – including energy, wage and transport subsidies – will raise expenditure by about 0.9% of GDP. This will be mitigated by across-the-board spending cuts amounting to around 0.3% of GDP, maintaining the budget deficit below the statutory limit of 3% of GDP. Despite the rising budget deficit and off-budget stimulus measures, such as the transfer of government cash balances to state-owned banks, the fiscal policy stance is only modestly supportive in 2025, as only part of the funds transferred to the new sovereign wealth fund translate into new investment outlays this year. Accelerating disbursements from the fund over 2026-27 are expected to support growth amid headwinds from the global trade slowdown. Public debt is expected to remain around 40% of GDP, with higher revenues needed to put it on a declining path.

Growth is expected to remain stable in the near term

Real GDP growth is expected to be 5.0% in both 2025 and 2026 before picking up slightly to 5.1% in 2027, driven by domestic demand. The reduction in tariff uncertainty following the bilateral trade deal with the United States and easier financial conditions will boost private investment, complemented by rising public investment outlays from the new sovereign wealth fund. Fiscal stimulus measures will support private consumption over the next few quarters. The increase in trade barriers is expected to weigh on external demand and export revenues. Inflation is expected to remain within the central bank’s target range, gradually rising to its mid-point as domestic demand growth normalises and the depreciation of the currency has fed 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 through higher import costs. Additionally, a larger-than-expected slowdown in China – Indonesia’s largest trading partner – would further weigh on exports, reduce import prices and raise imports from China. On the upside, a 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 eased some restrictions on foreign investment, but substantial barriers to foreign equity ownership persist, particularly in the telecommunications and transportation sectors. The broader investment climate also continues to be shaped by overlapping regulations, uneven policy implementation, and limited coordination across government agencies. Further progress in all of these areas will become increasingly important amid shifting global trade patterns and the reconfiguration of supply chains. At the same time, social initiatives such as the free meals programme can help reduce child malnutrition and strengthen public health, but more effective cost control and better targeting of vulnerable households would contain fiscal costs. Reducing labour-market informality would broaden the tax base and create fiscal space for expanding public investment in transport infrastructure, clean energy, health, and education. Strengthening the governance of public investment — through better project planning, monitoring, and evaluation — would help ensure that infrastructure spending translates into stronger and more inclusive growth outcomes.