Indonesia's economic convergence has stalled in recent years, largely reflecting slowing labour productivity growth. While robust investment has sustained rapid growth in the capital stock, growth in total factor productivity has been significantly lower than in emerging market peers. Unemployment has receded to pre-pandemic levels, but low female participation weighs on aggregate employment.

Reducing barriers to trade and foreign investment while expanding and deepening the network of bilateral and regional trade agreements would help boost global value chain integration and economic growth. Educational attainment and quality need to be enhanced while student skills need to become more closely aligned with labour market needs. Reducing regulatory red tape and levelling the playing field between state-owned enterprises and private businesses would boost investment and productivity.

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.