Based on the OECD’s June 2026 Economic Outlook

Growth

• Real GDP is projected to grow 4.7% in 2026, followed by a pick-up to 5.0% in 2027. OECD
• Recent momentum was actually strong: quarterly real GDP grew 5.6% year-on-year in Q1 2026, driven by robust domestic demand, with government consumption jumping 21.8% year-on-year. OECD
• However, forward-looking indicators are softening retail sales fell 1.9% year-on-year in April, and consumer confidence has weakened since the start of the year, with expectations for job availability also softening. OECD

Key drags

• Higher energy costs and policy uncertainty are expected to weigh on consumption and investment amid a weakening labour market. OECD
• Net exports are projected to make no net contribution to growth, as softer global demand for Indonesia’s export commodities is roughly offset by weaker imports amid moderating domestic demand. OECD

Inflation

• Inflation is projected to rise to 3.4% in 2026 as higher global energy prices gradually pass through to domestic prices, despite the current freeze on subsidised fuel prices. OECD
• Near-term prints have actually been benign: headline inflation eased to 2.4% in April from 3.5% in March, partly due to base effects from last year’s temporary electricity tariff discount. OECD

Policy stance

• Monetary policy is expected to stay unchanged through end-2026, as the fuel price freeze shields domestic inflation from rising global energy costs. OECD
• Fiscal policy is projected to be supportive in 2026, with increased spending on fuel subsidies and a free-meals programme only partly offset by tax hikes and spending cuts elsewhere. OECD
• The current account is expected to weaken, as higher gas/coal export prices aren’t enough to offset costlier oil imports. OECD

External context (why the downgrade)

• The Middle East conflict is a major swing factor globally: energy and input prices from the Persian Gulf have surged since February, pushing up headline inflation, with emerging signs of supply shortfalls from disrupted production and exports. OECD models two scenarios a “time-limited” disruption easing from Q3 2026, versus a “prolonged” one dragging into late 2027 with much weaker growth and higher inflation. OECD
• This is a downgrade from the OECD’s March 2026 interim outlook, which had projected 2026 growth at 4.8% (down from ~5.1% in 2025).

Structural recommendations from OECD

• Better targeting of energy subsidies toward vulnerable households would improve public spending efficiency. OECD
• Accelerating renewable energy deployment would boost energy security, while strengthening governance of sovereign wealth/holding entity Danantara would help maximize the impact of its investments. OECD
• Economic convergence has stalled recently, largely due to slowing labour productivity growth while capital stock has grown fast on strong investment, total factor productivity growth lags behind emerging-market peers. OECD
• Significant regulatory barriers high restrictions on services trade/FDI, local-content requirements, and other non-tariff barriers continue to hinder foreign investment and trade integration. OECD

Indonesia’s 2026 growth trajectory is a story of resilient domestic fundamentals colliding with an unfavorable external shock. The Q1 growth beat (5.6% YoY) shows the economy still has underlying strength, largely fiscal-stimulus-driven. But the OECD’s downward revision (from ~4.8% to 4.7%, with global growth cut to 2.9%) reflects genuine concern that the Middle East-driven energy shock is starting to bite visible already in weakening retail sales and consumer confidence. Bank Indonesia’s room to maneuver is constrained: cutting rates could stoke inflation as the energy shock passes through, while holding steady risks choking the consumption/investment recovery just as labour market softness deepens. The fuel subsidy freeze is buying time but isn’t a long-term fix, and OECD’s structural critique low productivity growth, red tape, weak trade/FDI integration suggests the real ceiling on Indonesia’s growth potential is structural, not cyclical.