Indonesia's Economy at Mid-2026: Warning Bells Ring Amid Strong Growth
Indonesia’s economy demonstrated strong resilience in the first half of 2026, with growth reaching 5.61% in the first quarter, one of the highest rates among G20 and Asian nations. However, beneath this solid performance, several economic indicators have begun to signal caution. Inflation is approaching the upper limit of the government’s target, the trade balance recorded its first deficit in six years, the rupiah briefly touched Rp18,000 per US dollar, and the manufacturing sector has re-entered a contraction zone.
Statistics Indonesia (BPS) recorded that the 5.61% growth in Q1 2026 was the highest since Q3 2022. Gross Domestic Product (GDP) at constant prices reached Rp3,447.7 trillion, while nominal GDP was Rp6,187.2 trillion. BPS Head Amalia Adininggar Widyasanti explained that growth was primarily supported by household consumption, which contributed 54.36% to GDP and grew by 5.52%. This consumption was boosted by the Lebaran holiday, increased mobility, and heightened activity in the restaurant, hotel, transport, and communications sectors. Investment, or Gross Fixed Capital Formation, also grew by 5.96%, contributing 28.29% to GDP. Together, consumption and investment accounted for 82.65% of total GDP. Nearly all business sectors recorded positive growth, except for mining and electricity and gas procurement.
Despite the strong growth, inflationary pressures are mounting. BPS reported that June 2026 inflation reached 0.44% month-to-month, up from 0.28% in May. Annual inflation hit 3.34%, nearing the government’s upper target limit of 3.5%. The transport sector was the largest contributor to inflation, driven by rising non-subsidised fuel prices. The government has issued warnings about potential increases in volatile food prices due to seasonal factors.
A significant alarm bell rang from the external sector. BPS recorded a trade deficit of US$1.61 billion in May 2026, ending a 72-month surplus streak that began in May 2020. Exports totalled US$23.20 billion, while imports surged to US$24.81 billion, with the oil and gas sector alone posting a deficit of US$3.76 billion as imports soared 70.78% year-on-year. This is expected to add pressure to the current account, which Bank Indonesia reported was already in deficit by US$4 billion, or 1.1% of GDP, in Q1 2026. The overall Balance of Payments also recorded a deficit of US$9.1 billion in the same quarter.
External pressures were also reflected in the currency market. The rupiah briefly touched the psychological level of Rp18,000 per US dollar on 6 July 2026, before closing at Rp17,985. The depreciation was fuelled by increased demand for US dollars for Hajj payments, corporate dividend repatriation, and a global flight to safe-haven assets. Bank Indonesia’s Senior Deputy Governor Destry Damayanti noted that global uncertainty, driven by conflict in the Middle East, was prompting investors to withdraw funds from developing countries.
Further concern came from the manufacturing sector. The S&P Global Purchasing Managers’ Index (PMI) for Indonesia fell to 46.9 in June, indicating a contraction and marking its lowest level in a year. S&P attributed the decline to a drop in demand for manufactured goods, with new orders falling for the first time in three months at the fastest rate in a year, leading companies to cut production for the fourth consecutive month. Coordinating Minister for Economic Affairs Airlangga Hartarto stated that the PMI weakness was primarily due to global supply chain disruptions, though the government maintains a relatively positive outlook for the manufacturing sector over the next 12 months.