Indonesia’s economy is expected to move toward higher growth in 2026, supported by a more accommodative global environment, resilient trade performance, and a gradual recovery in domestic demand, according to BCA Economic and Industry Research (19/12). However, the acceleration in GDP growth is projected to remain modest due to fiscal limitations and unresolved structural challenges.

The report notes that growth momentum will continue to rely heavily on government programmes and intervention packages, as private-sector demand has not fully recovered. Limited fiscal capacity may constrain the government’s ability to address longer-term structural weaknesses.

Global Economic Conditions Offer Support Amid Persistent Risks

Global economic conditions are expected to become more accommodative for Indonesia’s growth in 2026, as lower policy rates influence commodity prices and global financial conditions. Nevertheless, the transmission of these benefits remains uncertain due to ongoing challenges in the domestic economies of the United States and China.

The US economy has shown resilience supported by strong consumer spending, although signs of cooling in the labour market and uneven wealth effects point to growing fragility. Softer US consumption may gradually weaken import demand and spill over to global trade.

China’s economy continues to face persistent oversupply, weak domestic demand, and disinflationary pressures. Policy support remains focused on industrial output and exports, with financial resources largely directed to the corporate sector rather than household consumption.

Despite these risks, expectations of US Federal Reserve easing and China’s industrial consolidation may lift commodity prices in 2026. Stronger commodity prices and a weaker US dollar could improve Indonesia’s export earnings and external financial conditions.

Trade Performance Supported by Tariff Advantages but Expected to Moderate

Indonesia’s trade surplus performed better than expected in 2025, supported by lower import prices and front-loaded export demand ahead of tariff changes. Tariff advantages have helped sustain export growth, even amid a general decline in global commodity prices.

Exports benefited from Indonesia’s relatively lower US tariff rate compared with several regional peers, allowing Indonesian products to expand their share in certain US import categories. However, the sustainability of this advantage remains uncertain due to pending legal and political risks surrounding trade agreements.

BCA expects Indonesia’s trade surplus to moderate in 2026 as improving domestic demand and stronger investment activity lift imports. Export performance also remains heavily reliant on key commodities such as coal, crude palm oil, and nickel, exposing trade to price volatility and demand uncertainty.

Investment Growth Concentrated in Capital-Intensive Sectors

Fixed asset investment remained broadly stable in 2025, with a notable shift from structures toward machinery and capital-intensive industries. This pattern reflects stronger manufacturing activity, government-related capital spending, and continued development of special economic zones.

Foreign direct investment weakened during 2025 amid global uncertainty and softer nickel prices, resulting in a contraction in overall FDI flows. Investments related to nickel downstreaming were affected by weaker demand from China and compressing margins.

The decline in FDI was partially offset by accelerating domestic direct investment, which helped maintain overall investment momentum. However, investment growth remains concentrated in capital-intensive sectors, limiting near-term spillovers to employment and household income.

Domestic Demand Recovery Remains Late and Limited

Domestic demand showed signs of improvement only toward the end of 2025, following delays in fiscal spending earlier in the year. Household consumption recovered from its mid-year weakness but remains dependent on government spending and ad-hoc intervention measures.

Private consumption growth continues to be uneven, with spending concentrated among better-off households. Limited improvement in household liquidity and tighter lending standards have constrained broader-based consumption recovery.

Inflation conditions have remained relatively stable, helping to support purchasing power. However, rising food prices, wetter weather conditions, and expanded government programmes may pose renewed inflation risks in periods ahead.

Fiscal and Monetary Policy Face Tightening Constraints

Fiscal support remains a key pillar of economic growth, but the government’s fiscal space is increasingly constrained by weak revenue performance and rising interest costs. Expansive spending plans are expected to require higher debt issuance in 2026.

The need for increased borrowing may influence Bank Indonesia to maintain accommodative policy signals. Even so, benchmark government bond yields may settle higher than in 2025 due to uncertainty in foreign and domestic demand for sovereign bonds.

A moderating balance of payments position and narrowing interest rate differentials highlight limited improvement in the rupiah’s fundamentals. These conditions may expose the currency to episodic pressure and limit monetary policy flexibility.

This article is based on original reports from BCA Economic and Industry Research, titled 2026 Indonesia Economic Outlook Inching toward higher growth

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This article was created with AI assistance.