Real GDP is projected to grow by 4.7% in 2026, followed by a pick-up to 5.0% in 2027. Higher energy costs and policy uncertainty are expected to weigh on consumption and investment amid a weakening labour market. Net exports are projected to make no net contribution to growth, as softer global demand for some of Indonesia’s main export commodities is expected to be broadly offset by weaker imports amid moderating domestic demand. Inflation is projected to rise to 3.4% in 2026, as higher global energy prices gradually feed through to domestic prices, despite the current freeze in subsidised fuel prices.

Monetary policy is expected to remain unchanged until the end of 2026, as the current fuel price freeze shields domestic inflation from rising global energy prices. Fiscal policy is projected to be supportive in 2026, as increased spending on fuel subsidies and on a free meals programme is only partly offset by tax increases and expenditure cuts elsewhere. Public spending efficiency could be enhanced by better targeting of energy subsidies to vulnerable households. Accelerating the deployment of renewable energy would enhance energy security, while strengthening the governance of the sovereign investment and holding entity Danantara would help maximise the positive economic impact of its investments.

Indonesia's economic convergence has stalled in recent years, largely reflecting slowing labour productivity growth. While robust investment has sustained rapid growth in the capital stock, growth in total factor productivity has been significantly lower than in emerging market peers. Unemployment has receded to pre-pandemic levels, but low female participation weighs on aggregate employment.

Reducing barriers to trade and foreign investment while expanding and deepening the network of bilateral and regional trade agreements would help boost global value chain integration and economic growth. Educational attainment and quality need to be enhanced while student skills need to become more closely aligned with labour market needs. Reducing regulatory red tape and levelling the playing field between state-owned enterprises and private businesses would boost investment and productivity.