Indonesia’s Q1 growth hits 3-year high, but momentum seen peaking

[JAKARTA] Indonesia’s economy expanded at its fastest pace in more than three years in the first quarter of 2026, but economists warn that rising global tensions and domestic fiscal pressures could weigh on growth in the months ahead.

South-east Asia’s largest economy grew 5.6 per cent year on year in the January-to-March period, its fastest expansion since the third quarter of 2022, the statistics agency said on Tuesday (May 5). The figure also exceeded the median forecast in a Bloomberg poll and was higher than growth recorded in the final quarter of 2025.

But analysts cautioned that the strong performance may represent the peak of Indonesia’s growth this year as global uncertainties intensify.

“The first quarter likely marked the peak in the growth pace, with the momentum set to moderate in the subsequent quarters as real activity could be dampened by high energy prices and pressure to consolidate fiscal finances,” said Radhika Rao, senior economist at DBS.

Indonesia’s economy has been stuck around the 5 per cent range in recent years, well below President Prabowo Subianto’s goal of raising growth to 8 per cent.

Government spending boosted the economy

Indonesia’s strong growth at the start of the year was partly driven by seasonal spending and fiscal stimulus. Government expenditure surged 21.8 per cent from the year before as the authorities ramped up flagship programmes, including the free meal scheme and village cooperative funding, aimed at supporting household consumption.

Stronger household consumption during religious festivities, including the annual holiday allowance paid by employers, helped lift economic activity early in the year. Meanwhile, exports edged up 0.9 per cent in first quarter of this year, as global trade tensions linked to the Iran war and uncertainty over US tariffs weighed on external demand.

Coordinating Economic Affairs Minister Airlangga Hartarto said in a media briefing on Tuesday that government spending will be kept at a steady pace to further support economic growth in the coming quarters. He also noted that the government is considering introducing industrial incentives for the automotive sector.

Fallout from the Middle East war

Indonesia, like many of its South-east Asian peers, is facing mounting pressure as energy price shocks ripple through global markets following the closure of the Strait of Hormuz.

While the country’s direct trade exposure to the Middle East remains relatively small – accounting for about 1.6 per cent of its total import value – the country remains vulnerable to rising energy prices.

Analysts warned that higher energy prices could ripple through the domestic economy by raising costs for fertiliser inputs such as urea and ammonia, while more expensive petrochemical feedstocks may push up the prices of plastics.

Companies faced supply disruptions and higher input prices, while turbulence in the equity market dampened confidence.

Brian Lee and Chua Hak Bin, analysts at Maybank, said headwinds are likely to intensify in the second quarter, with net exports expected to narrow as cost pressures weigh on global trade. The bank, however, maintained its full-year growth forecast for gross domestic product at around 5 per cent.

“Pressures are rising in the second quarter,” they wrote, noting that higher fuel prices and a weakening rupiah are likely to push up the import bill and squeeze external demand.

The government has kept subsidised fuel prices unchanged until the end of the year. However, increases in unsubsidised fuel prices in April and May, particularly diesel, are expected to raise logistics costs and trigger spillover price increases for goods and services across the economy.

Inflation in Indonesia eased to an eight-month low of 2.4 per cent in April, down from 3.5 per cent in March. Prices rose just 0.1 per cent month on month, slowing from 0.4 per cent previously. However, inflationary pressures are expected to pick up in the coming months.

Economists said the inflation rate likely bottomed out earlier this year and could climb as businesses pass on higher costs.

Rupiah at an all-time low

The surge in import costs puts a burden on the economy as the rupiah hovers near a record low, reaching around 17,400 per US dollar at the end of April. The weaker currency has made imports more expensive, placing additional strain on both companies and public finances.

Since the start of 2026, the rupiah has weakened 3.88 per cent, while Indonesia’s foreign exchange reserves fell by US$8.4 billion in the first quarter, as Bank Indonesia stepped up interventions through offshore and domestic non-deliverable forwards, spot transactions and secondary market purchases of government bonds.

Costly spending

Beyond external pressures, economists say Indonesia is also facing broader structural problems at home.

A team of economists from the Macroeconomic, Finance and Political Economy Research Group in the University of Indonesia noted that the government is continuing to roll out fiscally costly flagship programmes, including a nationwide free-meal initiative.

Concerns over fiscal sustainability and policy clarity have also unsettled financial markets after credit-rating agencies such as Moody’s and S&P Global Ratings flagged uncertainties related to government policy and the role of the sovereign investment entity Danantara.

Indonesia’s status as a net oil importer also means higher global oil prices could widen the fiscal burden, particularly because the government heavily subsidises fuel for consumers.

Taken together, economists warn that the government may soon face difficult fiscal choices.

“With rising oil prices, a weaker rupiah and expanding government programmes, Indonesia’s fiscal space could deteriorate substantially,” the University of Indonesia economists wrote, adding that the authorities may need to reallocate spending to keep the state budget deficit within the legal limit of 3 per cent of GDP.