OECD Projects Indonesia's Economic Growth at Only 4.7% This Year

The Organisation for Economic Co-operation and Development (OECD) has again lowered its economic growth projection for Indonesia amid global energy price pressures and rising policy uncertainty due to the Middle East conflict. In the June 2026 edition of the OECD Economic Outlook, Indonesia’s economic growth is estimated at 4.7% in 2026, down from 4.8% in the previous report. The OECD forecasts that economic growth will only strengthen to 5% in 2027 after external pressures begin to ease. The OECD assesses that rising energy costs and global uncertainty will weigh on household consumption and investment, alongside a weakening domestic labour market. “Rising energy costs and policy uncertainty are expected to weigh on consumption and investment amidst a weakening labour market,” the OECD wrote in its report. Although slowing, Indonesia’s economy is considered more resilient than many other developing nations due to lower dependence on energy imports from the region. The OECD noted that Indonesia’s economy actually started 2026 quite strongly. Gross domestic product (GDP) grew 5.6% year-on-year in the first quarter of 2026, supported by domestic demand and government spending which surged 21.8%. Household consumption and investment also remained solid after monetary policy easing throughout 2025 drove down borrowing costs. However, several recent indicators are beginning to show weakening economic momentum. Retail sales were recorded down 1.9% year-on-year in April 2026. Consumer confidence has also started to weaken, especially regarding employment expectations. On the other hand, inflationary pressures are beginning to increase due to the surge in global energy prices. The OECD estimates Indonesia’s inflation will rise to 3.4% in 2026 from 1.9% in 2025. This increase is triggered by the knock-on effect of global energy prices on domestic prices, although the government is still holding subsidised fuel prices. The institution considers Indonesia relatively more resilient compared to other Asian countries because Indonesia remains a net energy exporter when accounting for coal and gas exports. This condition makes the terms of trade impact from the Middle East conflict on Indonesia more limited. “For Indonesia, the impact of global trade policy changes due to the evolving conflict in the Middle East is relatively limited,” wrote the OECD. Nonetheless, the OECD reminded that the risk of rising production costs remains elevated due to the surge in fertiliser and industrial raw material prices in the global market. External demand uncertainty also still looms over Indonesian exporters even though United States tariff policies have begun to ease. The government is considered to have responded to global energy pressures by freezing subsidised fuel prices, accelerating the implementation of B50 biofuel, and implementing a policy of working from home one day per week for civil servants to save energy consumption. The OECD estimates Indonesia’s fiscal policy will remain expansionary in 2026. The increase in energy subsidy spending and the free meal programme is expected to be only partially offset by tax increases and cuts to other expenditures. The government’s fiscal deficit is projected to be at 3% of GDP in 2026, while the government debt ratio increases to 40.7% of GDP. At the same time, the current account deficit is expected to widen to 0.7% of GDP. The OECD also assessed that the efficiency of government spending can still be improved, especially through better-targeted energy subsidies to vulnerable groups. “The efficiency of public spending can be improved through better-targeted energy subsidies to vulnerable households,” wrote the OECD. In the monetary sector, the OECD expects Bank Indonesia to maintain a moderately tight policy until the end of 2026 to maintain inflation and exchange rate stability. The risk of imported inflation is considered to have increased after the rupiah depreciated against the US dollar since the start of the year. Beyond energy issues, the OECD also highlighted the importance of strengthening the governance of the Daya Anagata Nusantara Investment Management Agency, or Danantara, so that its economic impact is more optimal. The OECD assesses that strengthening Danantara’s governance is important to maximise investment contributions to national economic growth.