How Economic Growth Could Be Affected If the US-Iran Conflict Continues

The Institute for Development of Economics and Finance (Indef) projects that Indonesia’s economic growth could decelerate by 0.21 per cent if the Middle East conflict, accompanied by a surge in energy prices, continues until the end of 2026. Indef Programme Director Eisha M. Rachbini stated that the projection is based on simulation results from a computable general equilibrium (CGE) model developed by the Indef team to measure the impact of global economic shocks on the Indonesian economy. In the first scenario, assuming a 30 per cent increase in world oil prices from a baseline of US$70 per barrel, the consumer price index (CPI) is estimated to rise by 0.28 per cent. Concurrently, real wages are projected to fall by 0.26 per cent, exports to contract by 2.44 per cent, and imports to surge by 7.80 per cent due to higher energy needs and costs. Investment is expected to increase by 1.20 per cent, but economic growth would still slow by 0.21 per cent. ‘When oil prices rise, purchasing power is eroded, inflation increases, and real wages fall. Exports also decline because imports will increase significantly. Although we also have export commodities that rise, there is a contraction from the purchase of imported fuel,’ Eisha said. The second scenario depicts an economic slowdown in Indonesia’s main trading partners. Assuming import demand from Indonesia’s export destinations falls by 5 per cent, the CPI is estimated to rise by 0.11 per cent, real wages to fall by 0.29 per cent, and investment to increase by 0.36 per cent. Exports are projected to experience the deepest decline at 5.05 per cent, while imports would decrease by 0.23 per cent. This condition would lead to a 0.24 per cent correction in economic growth. In the third scenario, involving trade fragmentation and global supply chain disruptions due to rising tariffs and non-tariff barriers, the CPI is estimated to increase by 0.18 per cent and real wages to fall by 0.23 per cent. Investment would be nearly stagnant, rising only 0.07 per cent, while exports and imports would fall by 1.16 per cent and 0.30 per cent, respectively. Under this scenario, economic growth is estimated to slow by 0.17 per cent. ‘We conclude that if geopolitical risks, supply chain disruptions and fragmentation, and climate change are not anticipated with strong economic fundamentals and sound policies, this will result in a growth contraction,’ Eisha said. Given these challenges, Indef estimates that Indonesia’s economic growth in the second quarter of 2026 could potentially slow to around 5 per cent year-on-year, amid normalising consumption after the Eid al-Fitr holiday, pressure on energy and food prices, a weakening rupiah, and rising production costs.