Responding to Indonesia's Economic Slowdown

Indonesia’s economic growth in the second quarter of 2026, while slowing, remains encouraging. Amidst ongoing global economic uncertainty, the Indonesian economy has not collapsed. The Central Statistics Agency (BPS) recorded on Wednesday, 5 August 2026, that Indonesia’s gross domestic product (GDP) grew by 5.29 percent year-on-year in the second quarter of 2026. This figure is higher than the 5.12 percent growth in the same period last year, but lower than the 5.61 percent achieved in the first quarter of 2026. Indonesia’s GDP in the second quarter of 2026 reached Rp 6,552.1 trillion at current prices, and Rp 3,576.2 trillion at constant prices.

Indonesia has managed to maintain economic growth above 5 percent, primarily supported by domestic consumption and government priority spending. In the second quarter, the manufacturing sector, which has been the backbone of the economy, was reported to have slowed. This indicates that the engine of growth from the production side has not yet recovered. Conversely, the highest growth in the second quarter of 2026 came from government spending and sectors closely linked to government programmes.

An economic slowdown is a condition where the rate of growth in business activities, production of goods, and services decelerates compared to a previous period, but does not necessarily fall into a negative zone like a recession. This phenomenon typically occurs due to declining public purchasing power, tightening of central bank interest rates, global geopolitical tensions, and international supply chain disruptions that simultaneously suppress production and business investment activities.

In Indonesia, the manufacturing industry remains the largest contributor to GDP with an 18.5 percent share. However, its growth slowed to 4.52 percent year-on-year, lower than the 5.04 percent recorded in the previous quarter. This is despite the sector being the main driver of production, investment, and job creation. During the second quarter of 2026, the highest growth came from government spending and the execution of priority programmes that consumed a large allocation of state budget funds.

BPS noted that government consumption grew by 15.97 percent year-on-year. Although this was a decrease from the 21.81 percent growth in the first quarter of 2026, it remained the highest growth among other main expenditure components, such as household consumption (5.06 percent), gross fixed capital formation (6.87 percent), and exports (4.13 percent).

Government spending also spurred growth in other sectors, such as the accommodation and food and beverage services sector, which grew rapidly by 10.60 percent. The improved performance of food services, coinciding with the expansion of the Free Nutritious Meals (MBG) programme’s beneficiary coverage, is thought to have supported economic growth. Besides the food and beverage sector, the construction sector also experienced 6.68 percent growth, partly supported by the Merah Putih Village/Sub-district Cooperative programme.

Thanks to state budget support, the economic slowdown in Indonesia can be prevented from worsening. Although the fiscal space is increasingly narrow, the government will certainly ensure the maintenance of public purchasing power and strive to keep economic growth on target. The government is aware that if the economic slowdown is not prevented, its impact will inevitably spread to the real sector. It must be honestly stated that Indonesia’s current economic condition cannot be said to be completely fine. The potential for Indonesia to slip into the trap of a country facing economic and social problems remains very much open.

Currently, signs and impacts of the economic slowdown have nonetheless occurred in various regions. As a result of declining economic activity, what is happening on the ground is an increase in unemployment. Many companies are trying to reduce operational costs by halting new recruitment. Some companies have even reportedly carried out mass layoffs to survive. According to the May 2026 National Labour Force Survey (Sakernas) data, the total working-age population that is unemployed reached 7.22 million people, and around 14.31 percent, or 1,033,182 people, have an applied bachelor’s, master’s, or doctoral degree background. Thus, there is no guarantee that achieving a degree will ensure a desired job.

Sluggish business activity has sooner or later reduced government tax revenues. The fiscal space for infrastructure development and subsidies has become much narrower. In the market, we can see that the pressure on the rupiah exchange rate has not eased. The rupiah exchange rate seems to be struggling to move from the level of Rp 18,000 per US dollar. Lately, we have seen a tendency for foreign capital flows to exit towards safer and more profitable markets. This condition has caused the local currency to depreciate against the US dollar.

The economic slowdown has also inevitably affected the economic conditions of the people. Referring to BPS data, the number of poor people in Indonesia in March 2026 was recorded at 22.93 million people, equivalent to 8.07 percent of the total population. This figure shows a decrease compared to September 2025, which was 23.36 million people. However, differing from the data usually released by BPS in the mass media that the number of poor people in Indonesia has decreased, President Prabowo, when meeting with media editors, openly indicated an increase in the number of poor people in Indonesia. In 2017, the number of poor people was recorded at 46.1 percent, while in 2026…