Indonesia's Economy Grows 5.29%, Domestic Demand Serves as Mainstay
Indonesia’s economy demonstrated resilience amid global economic pressures and financial market turmoil. In the second quarter of 2026, the national economy grew 5.29% year-on-year (YoY), remaining above the 5% level despite slowing compared to 5.61% growth in the first quarter of 2026. This growth occurred while the global economy continued to face various challenges, ranging from geopolitical conflicts, trade wars, supply chain disruptions, to financial market and exchange rate volatility.
In his State Address on 14 August 2026, President Prabowo Subianto also expressed optimism about the resilience of the national economy. Throughout the first half of 2026, realised investment was said to have reached Rp1,010 trillion and created more than 1.4 million jobs.
Dzikri Firmansyah Hakam, a lecturer at the School of Business and Management (SBM) of the Bandung Institute of Technology (ITB), stated that second-quarter economic performance should be viewed by distinguishing between financial market dynamics and real economic activity. Changes in financial market sentiment occur far more quickly than changes in consumption, credit, investment, production, and employment. Pressure in financial markets has not yet fully translated into weakening real economic activity.
“Financial market pressure, in its early stages, mostly affects asset prices, portfolio allocation, foreign portfolio investment flows, risk premiums, and perceptions of Indonesia’s investment attractiveness. The impact on the real sector will only become more pronounced if the pressure continues into rising capital costs, slowing investment, declining corporate expansion, and reduced job creation and public income,” he explained on Saturday (22/8).
According to Dzikri, this dynamic is visible, among other things, in the issue of Indonesia’s investability. In June 2026, MSCI highlighted concerns about shareholder transparency and coordinated trading in the Indonesian stock market and opened the possibility of consultations regarding a change in Indonesia’s classification from Emerging Market to Frontier Market if the necessary improvements are not seen by November 2026. On the other hand, foreign capital flows showed developments that were not entirely in line with the pressure on the stock market.
“Bank Indonesia recorded that foreign portfolio investment in the second quarter of 2026 experienced a net inflow of US$8.5 billion, mainly into Government Securities and Bank Indonesia Rupiah Securities. This development is more accurately understood as a change in portfolio preferences and allocation, not merely an outright exit of foreign capital,” he explained.
Dzikri assessed that domestic demand remains one of the main cushions of the Indonesian economy. Household consumption in the second quarter of 2026 grew 5.06% YoY, although slowing from 5.52% in the previous quarter. With its large share in the national economic structure, household consumption continued to make an important contribution to growth.
The ability of households to maintain consumption was also supported by relatively controlled inflation. Inflation in June 2026 was recorded at 3.34% YoY and remained within Bank Indonesia’s target of 2.5% plus or minus 1%.
“Pressure on purchasing power has not yet developed into inflationary turmoil large enough to suppress consumption broadly. Besides consumption, economic activity is also supported by bank lending. In June 2026, bank credit grew 12.67% YoY. Investment credit grew 24.90%, working capital credit 8.94%, while consumption credit grew 5.75%. Bank Indonesia’s Banking Survey shows that the Weighted Net Balance of new loan disbursement increased to 93.08% in the second quarter of 2026, from 38.74% in the first quarter,” he said.
According to Dzikri, this condition shows that the banking intermediation function is still working. As long as the banking intermediation function operates, capital market volatility does not necessarily halt production, investment, and consumption. Government spending is also a factor maintaining growth momentum.
Government consumption in the second quarter of 2026 grew around 15.97% YoY, although lower than the 21.81% growth in the first quarter. The growth in government consumption was supported by the realisation of a number of priority programmes, accelerated spending, payment of the 13th salary for civil servants, and social assistance. Public consumption also received support through food assistance and transport stimulus.
“Government spending has a direct impact on growth while potentially creating income for households and companies. That income can then further encourage consumption and production activity. Thus, second-quarter 2026 growth was mainly supported by domestic demand with fiscal policy support,” he explained.
From the investment side, Dzikri continued, Gross Fixed Capital Formation (PMTB) grew 6.87% in the second quarter of 2026 and became one of the sources of economic growth. However, he cautioned that investment growth does not automatically reflect increased private investor confidence. Based on Bank Indonesia’s records, investment growth was mainly supported by building investment related to the National Priority Work Programme. Meanwhile, private investment still needs to be strengthened.
“The character of investment, which has a relatively long implementation cycle, also means that projects that have already entered the construction or procurement stage are not necessarily halted simply because of short-term changes in market sentiment. Therefore, investment resilience does not always mean resilience of private investor confidence,” he said.
Dzikri noted that external sector dynamics also need attention. In May 2026, Indonesia’s exports were recorded at US$23.20 billion, while imports reached US$24.81 billion, resulting in a deficit of around US$1.61 billion.